July 23, 2008
Column #1,404
"The Borrower Is a Slave to the Lender"
Benjamin Franklin

by Mike McManus

We've seen the signs along highways: PAYDAY ADVANCE! NEED MONEY NOW?  They didn't exist a decade ago.   Between 2000 and 2004 payday lenders doubled from 10,000 to 20,000.  They now outnumber McDonald's.

They offer "fast cash" and "free money" to 15 million people every month.

The sign on a "Check 'n Go" says "Getting a loan from us is as easy as 1-2-3.

"1. Just Write Us a Personal Check.

"2. Get the Cash You Need Instantly.

"3. We Hold Your Check Until Your Next Payday."

Do you know what the interest rate is on those loans?  Guess. 15% APR, 30%, 50%, 100%, 200%, 300%, 450%?

If you guessed 450% you would be right.

Say you need $300 to repair a car.  You write a check for $360, which the loan shark holds for two weeks until her next payday. If you have other expenses two weeks later, and the check does not clear, you are charged another $60 for two weeks plus a penalty. That rollover scenario can happen repeatedly.

In fact, the average customer pays $793 for a $325 loan, according to Prof. Christopher Peterson, law professor at the University of Utah.

Ezekiel denounced such practice as grave sin:  "He lends at usury and takes excessive interest. Will such a man live?  He will not! Because he has done all these detestable things, he will surely be put to death, and his blood will be upon hi sown head" (18:13).

In early Roman times, interest was capped at 12%.  Chinese emperors decreed 36% the maximum.  In the 1970s, U.S. usury laws capped consumer finance at 36% until a Supreme Court case which, in effect, eliminated usury limits.

The result is that today's median rate is a whopping 390%.

Congress became so alarmed at how young military recruits were plunging into deep debt due to payday loans, that it passed a law capping allowable interest at 36%.

Why not pass a similar limit for the rest of America?

With the economy on the edge of recession, if not already in one, now is the time for the nation to ferret out corruption in lending practices that have entrapped millions in ever-mounting debt.  For months we have read about banks making unsound loans to people who could not repay them, but escaped any losses by selling the loans to others.  Even Merrill Lynch lost billions.

Of course, individuals who sign up for payday loans or mortgages with unbelievably low introductory rates that quickly escalate are responsible for their debt.  But government needs to impose rules, such as usury limits on interest rates, to limit the number of borrowers who become slaves to the lenders. 

In February, the Institute for American Values published an important document on these issues, "For a New Thrift: Confronting the Debt Culture" (which can be downloaded at www.Americanvalues.org.)  It labeled payday lenders as "anti-thrifts," organizations which provide short-term benefits at excessively high cost. Two other anti-thrifts:

- Credit cards, a billion of which are in the hands of consumers, whose average household debt is $8,565.  Compare that to the average household saving of $392 each year. Consumer debt, which does not include mortgages, was a record $2.56 trillion in April.

       - State lotteries which took in a stunning $57 billion in 2006, with annual per capita spending at $500 in some states. A fifth of Americans are frequent players.  Tickets are sold at 200,000 outlets. The share spent by low income households is 32 times larger than higher income households, the report stated.

Some churches are confronting this debt culture with particularly creative strategies. Most striking is the large African-American First Baptist Church of Glenarden, MD, whose pastor, Rev. John Jenkins, urged church members to come to the altar, cut up their credit cards, and place them at his feet.

"If we want to have victory, we have to come out of financial bondage," he preached. Hundreds of parishioners complied.  When the church sponsored a marriage retreat last weekend, many bought books from the speakers, paying with cash; only a handful used credit cards.

Many churches are also offering financial counseling. "We have to teach about stewardship the same way we teach about forgiveness," asserted Rev. Kerry Hill who leads a consortium of clergy in metro Washington. "A lot of pastors agree that we have talked about tithing, and we need to talk about the other 90 percent."