Payday lending operations have grown rapidly in the United States since the early 1990s. At the industry's peak a few years ago, there were more payday lenders in the United States than McDonald's and Burger King stores -- combined.
"The payday lender is kind of the emergency banker for the working poor," explains journalist Gary Rivlin. "The idea is that you have some bills that you have to pay today -- your check isn't coming for a couple weeks, and you can take a loan out against that upcoming check."
In return, a person agrees to pay interest on the loan -- which can be up to "200 percent interest or more on their money," Rivlin says. "It's a bridge loan to cover a gap, but the problem is, the gap keeps getting wider and wider."
Rivlin goes behind the scenes of the payday lending industry in his new book Broke, USA, which examines the $33 billion-a-year "poverty industry." Rivlin, who attended an annual conference of check cashers to learn industry tips, says he decided to write about the industry because of its rapid growth in recent years.
"I was intrigued by how big these companies had become," he says. "It used to be that you could drive a Cadillac and have a nice big home through check-cashing or as a pawnbroker. But now people are making tens of millions, if not hundreds of millions, off of these businesses. I wanted to explore a world that seemed upside down to me -- where people with little money in their pockets was good for business."
Interview Highlights
On why payday loan operations exist in poorer neighborhoods
"[Payday loan operations] are there because banks have fled certain neighborhoods -- it's working-class neighborhoods, inner-city neighborhoods, some rural neighborhoods. Where can you get your loan? You go to a payday lender, you go to a consumer finance shop [or] you go to a pawnbroker. To me, the real reason payday has grown like it has is more of an economic reason than a geographic reason. There's been stagnating wages among the lowest 40 percent [of wage earners] in this country, and so they're not earning anymore real dollars. At the same time, rent is going up, health care is going up [and] other expenses are going up, and it just becomes harder and harder and harder for these people who are making $20,000 [or] $25,000 [or] $30,000 a year to make ends meet. And the pay lenders are really convenient. Between going home from work and going shopping, you can stop at one of these stores and get instant cash in five minutes."
On how the payday lenders, pawnbrokers and check cashers see themselves
"They tend to cast themselves as noble. You know, 'We're in neighborhoods doing business where others don't go.' It's almost heroic because they're brave enough to be doing business -- they cast themselves as providing an essential service for the person who otherwise would be trapped. What do you do if your car breaks down and you owe a few hundred dollars, or you need to pay the auto mechanic a few hundred dollars and you don't have a rich uncle to hit up [or] a credit card? The credit lenders claim that they play an essential role in helping these folks."
On how the payday lenders, pawnbrokers and check cashers see banks
"They were using the banks as a convenient whipping boy. [They were saying] 'consumer advocates were on our case about the check-cashing fees we charge or about charging $15 for every $100 for a payday loan. Meanwhile hundreds of thousands of dollars were being lent in these subprime loans, and it virtually blew up the global economy.' So it was a very handy whipping boy, but the banks have been the best thing happening for the payday lenders and check cashers. They fled these communities, creating the opportunity. But more than that, it's the big banks -- the main banks, from Goldman Sachs to Wells Fargo to Wachovia to Bank of America and Citibank -- that funded these industries. Whether it's the subprime credit card industry, the payday lenders -- they provided the funding and eventually helped bring some of these companies public."
On the profit margins in the payday loan industry
"Until recently, they were making profit margins of 20 percent to 25 percent a year. I used to write about Silicon Valley for The New York Times. You would get noticed in Silicon Valley if you were making profits of 20 percent [or] 25 percent a year -- and at the same time growing in double digits year after year. To me, the moral point is: Sure, there's nothing wrong with doing business in the inner city or working-class community in a rusted-out Midwestern town; it's just that you're making so much more profit off the working poor than you are over the more prosperous customer. That, to me, is where we get into morally questionable behavior where there's a profit opportunity."
On rent-for-loan operations
"You need a bedroom set. You want a flat-screen TV. You just can't put it on your credit card the way a lot of people could do it. But you want the item. And so you rent it by the week or the month, and after a certain amount of time, typically 1.5 years, it's then yours, assuming you made every payment along the way. The genius there is [rent-for-loan operators] have figured out how to sell a $500 television set for $1,200. And their customers tend to be happy -- they want the TV, there's no other alternative that they can figure out to buy it, so they rent it by the week and if there's a happy ending -- if they made all the payments -- then they get to keep it."
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