Financial stress may lead to short-term borrowing

In financial circles, they’re called subprime borrowers.

In many cases, they’re the people just down the block — the couple who missed a credit card or college loan payment or two, or the young parents with two incomes, an empty savings account and maxed-out credit cards.

They are average Americans with not-so-squeaky-clean credit histories turned down for decent-rate loans by banks. And when the car breaks down and the rent is due, they need cash. A short-term lender is often the only place that will help.

Payday lenders give convenient and fast loans. Rent-to-own furniture stores and buy-here, pay-here car dealers charge small monthly payments even if interest is high, which extends the life of the loan and often results in the customer paying far more than the item is worth.

Such lenders are part of a growing “fringe” economy that now extends into the middle class.

“They tend to be locating more and more in middle-income neighborhoods,” said Howard Karger, author of “Short Changed: Life and Debt in the Fringe Economy.” “That’s their market. They’re turning to the middle class maxed out on credit card debt. They’ve already saturated the low-income market.”

There are now 22,000 payday-lending outlets nationwide, up from 7,000 to 10,000 in 2000, according to the Center for Responsible Lending, a leading community development lender.

“More than anything else, we’re seeing the effect of lateral wages, and we’re also seeing the effects of welfare reform,” Karger said. “People are just not making ends meet.”

Welfare-reform laws that required states to place 50 percent of recipients in jobs by 2000 and created a lifetime cap on assistance led to a drop in caseloads from 14 million to 5 million from 1994 to 2002, Karger said. Requests for emergency food services increased 17 percent from 1996 to 2001.

There’s also been a cultural change in what’s considered a necessity.

“I don’t think our parents, 12 years ago, would have ever considered taking out a home-equity loan to buy a new car,” said Reynold Nesiba, an economist at Augustana College in Sioux Falls, S.D. Today, a two-car household is considered a necessity.

And the credit card industry is continuously trying to increase its market base, which has expanded from those with superb credit to include anyone, including college students with little or no income.

“I think sometimes people think if they get a credit card, the lender thinks they can spend that much,” said Ellen Schloemer, research director at the Center for Responsible Lending.

As the number of people considered too risky for prime credit grows, companies such as Dollar Loan Center are thriving. The company gives signature loans in amounts as high as $1,000.

“I view our company as more of an alternative to banks,” said Bruce Cooey, a co-owner who manages the Sioux Falls-area stores. “We’re overdraft protection for people who don’t have great credit.”