It's Expensive to be Poor

Let’s say you need to borrow $500. You probably have a good credit score, but let’s pretend you don’t. Let’s also pretend you make minimum wage, $7.25 an hour in Idaho. That brings in about $1400 a month because you actually have two minimum wage jobs and work on average 50 hours a week. You have a clunky old car that’s worth maybe $2,000 right now if you include the six-pack of Pepsi in the trunk.

But the car’s the problem. It needs a new transmission, which won’t really be new because you can get a used one for $950. You and a buddy can probably put it in. You only have $500 in savings.

So, what are your options? The first thing you think of, after striking out with family members, is a payday loan. There’s a place you go to cash your checks from work. It only costs about 15 bucks to cash a payroll check.

The people at the loan place are friendly. They know you. But, as you start to fill out the paperwork you spot the loan rate, which is in boldface. You’ll be paying an annual percentage rate (APR) of 482.32 percent.

Looked at another way, it will cost you $18.50 per $100 borrowed. In 14 days, you’ll need to pay back $592.50. That payday loan is going to take practically your whole paycheck. That’s not going to work. Maybe there are other options.

You ask about a signature loan, but that’s even more. You’ll owe $624 in 14 days because the APR is 625.71 percent. Not helping

So, how about a title loan? The interest is less, only 304.17 percent and you have 30 days to pay it back. Better. You’ll owe $625 in 30 days, which you could spread over a couple of paychecks.

You’re still a little uneasy about that interest rate, so you ask if there are other options. The nice man behind the desk asks if you could make payments of $38.99 every two weeks. Yes, yes you could. In fact, that sounds easy. How many payments? Just 25 at that rate, with one final payment of $39.33. The interest rate would be 159.76 percent, which is now sounding like a bargain.

So, how much will you end up paying for your $500 loan? Just $1,014.08. Given your situation, that’s probably the one you’ll choose.

It’s expensive being poor.

If you thought payday loans were an outrageous 25 or 30 percent, you’ve never applied for one. In Idaho, a payday loan can have an APR as high as 652 percent according to the Center for Responsible Lending.

Idaho does regulate the payday loan industry. The APR in boldface type is one of those regulations. You also can’t borrow more than $1,000. Beyond that, lenders have few restrictions.

The industry blanches at the thought of regulation, saying that capping rates will put them out of business. Yet, their rates for loans to military personnel have been capped at 36 percent APR since 2006 by federal law. Do lenders still loan to people serving in the military? There are at least three payday loan establishments in Mountain Home.

In Colorado, voters passed a 2018 initiative capping payday loans at 36 percent APR. Predictions of doom from the industry turned out to be wrong. There are still plenty of payday lenders in Colorado.

Idaho is the least regulated state in the nation. That’s good, for the most part. But isn’t it time to put some sideboards on the payday loan industry?