The news has been terrible lately for consumers.
The U.S. Supreme Court has given its stamp of approval to credit-card companies that sock their customers with costly late fees and penalties - even when those charges are outlawed by cardholders’ home states.
And the nation’s banks are hiking their fees for just about everything. Some of them even charge you twice for using your ATM card.
But if you think taking a $15 dollar hit for forgetting to mail in your credit-card payment on time or paying $5 to withdraw cash from a bank machine is a rip-off, try paying 339 percent interest to borrow $75 from a “signature-loan” company. Or try plunking down 240 percent interest (and turning over your wedding band) to get a loan from a pawnbroker. Or try giving up a $20 cut just to cash a $400 check at a check-cashing outlet.
Downscale consumers - people with low incomes or bad credit records - routinely pay prices that credit card customers wouldn’t dream of paying.
James Baldwin said it years ago: It’s expensive to be poor. But these days poverty is also big business. Corporate America has discovered it can make tantalizing profits by gouging the estimated 60 million Americans who don’t have bank accounts or access to competitive-rate loans.
Ford Motor Co. and NationsBank, for example, own giant finance companies that specialize in this market. Associates Corp. of North America, which operates Ford’s consumer-finance empire, earned nearly $1 billion in pre-tax profits in 1994.
Growing chains of pawnbrokers and check-cashing outlets are now traded on Wall Street. Stock analysts estimate that used-car loans for people with shaky credit now top $60 billion a year. Mercury Finance, the leader in this market, rang up a return on assets of 9.4 percent in 1994 - six times as much, Forbes Magazine admiringly noted, as what the best-run banks earned.
Mercury’s customers pay interest rates as high as 40 percent. Associates’ customers often pay more than 15 percent on mortgages and 30 percent for personal loans.
Why are so many consumers willing to pay such painful rates?
Many lack education or experience with money, or they fall into a get-it-now mentality. Others are simply desperate, because they’re out of a job or snowed under by uninsured medical bills. They’re willing to pay any price to cover the rent or stave off the bill collector.
These financial companies defend themselves by saying they’re taking big risks by providing a service to folks who have nowhere else to go.
Certainly, there’s nothing wrong with charging more to cover the pitfalls of lending to people with unstable incomes or lousy credit records. But the prices these consumers pay often exceed the true risks, and these transactions are usually lousy deals for the customer.
Can’t government do something about triple-digit interest rates that, in another era, were called usury?
For the most part, the rates most downscale lenders charge are perfectly legal. In many states, lawmakers have watered down usury laws, and in others, such as Oklahoma, high rates have been around for decades. Under Oklahoma’s “signature-loan” statute, a customer who borrows $90 for three months pays $42 in interest - an annual rate of 207 percent. A credit-card customer who borrows $90 at 17 percent pays about $5 over the same period.
Better-off consumers are justified in screaming about the disturbing rise in penalties and fees in the banking and credit-card markets. But at least they can still shop around and get free checking, or find credit cards with interest rates as low as 6 percent or 8 percent.
Disadvantaged consumers, on the other hand, need reasonable interest-rate limits to protect them. Too often competition in the downscale market seems to work in reverse: There’s a race to see who can charge the most outrageous prices - and who can rake in the most bucks by helping customers dig themselves into holes they may never escape.
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