The most financially vulnerable Americans are falling into the Debt Trap.
By Larry Checco
Fifty years ago, President Lyndon B. Johnson launched his Great Society, a set of domestic programs to eliminate poverty and racial injustice in America.
About 12 million low-income Americans depend on payday loans to bridge a gap in their cash flow.
According to some estimates, we’ve spent upwards of $22 Trillion taxpayer dollars in hopes of creating such a society. Yet fundamentally little in the way of poverty and racial justice has changed.
Today, 46.5 million Americans live in poverty, 16.1 million of whom are children. Millions more live on the edge, one job loss or one illness away from an impoverished existence.
For those of us old enough to remember the 1960s, the recent rioting in Ferguson and Baltimore again brought to light—under very unfortunate, but familiar circumstances—the stark economic and racial divides that continue to exist in America.
So, it’s 50 years later. What do we do now?
Sure, we can continue to try to resolve poverty with yet another array of expensive, socially conscious endeavors, starting with investing more in early childhood education, programs to support disadvantaged youth, adult education and skill-building opportunities, increasing earned-income tax credits, to name just a few of the usual suspects. And we should.
But there’s an insidious, systemic countervailing force at work in our society that few are willing to acknowledge or do anything about. Yet this pernicious force undermines all the well-intentioned aims of any anti-poverty program you can think of—and it’s called “The Debt Trap!”
The Debt Trap is a tight weave of capitalistic enterprises that leave people locked into perpetual debt, resulting in generations of poverty—and utter hopelessness. [pullquote]Vulnerable populations are often sold financial products they don’t need, are the victims of excessive fees, and targets for abusive prepayment penalties.[/pullquote]
How do already financially at-risk populations fall into The Debt Trap? Let us count the ways:
• Payday lending. About 12 million low-income, mostly unbanked Americans use a payday loan of usually $500 or less to bridge a gap in their cash flow. According to the Center for Responsible Lending, the typical two-week payday loan has an annual interest rate ranging from 391 to 521 percent. You do the math—and identify the consequences!
• Car Title Loans. A typical car title loan, according to the Association of Consumer Advocates, has a triple-digit annual interest rate, and puts at high risk an asset that is essential to the well being of working families—their vehicle. Like payday loans, car title loans often trap borrowers in a cycle of debt—and often leave them without personal transportation to get them to their jobs.
• Predatory mortgage lending. The driver of the Great Recession, predatory mortgage lending, often referred to as subprime mortgage lending, in recent years resulted in 10 million foreclosures and is estimated to still cost Americans—mostly low- and moderate-income families—more than $9.1 billion each year. As of a year ago, according to Zillow, 9.7 million American households still have “underwater” mortgages, meaning they owe more than the current value of their home. Despite recent events, such lending practices continue to plague low-income, minority neighborhoods.
• Tax-lien foreclosure auctions. In an effort to recoup back property taxes, many local governments resort to tax-lien auctions, enabling “investors” to purchase these liens and charge homeowners interest rates of anywhere from 18 to 50 percent. Homeowners often lose their homes to foreclosure in this process, wiping out decades of home equity and depriving families—sometimes for generations—from building wealth. The average tax lien, according to the National Consumer Law Center, is less than $2,000. The inanity of this system is now the local government has a homeless family and a vacant property to contend with—and at what cost to taxpayers!
• Revolving credit card debt. The letter arrives in the mail from Trust Us Bank congratulating you for having been preapproved for a $25,000 credit limit. Good news, right? Well, not exactly. If you don’t pay your full credit card balance at the end of the month, the bank charges interest on the amount you still owe — anywhere from 10 to 28 percent, according to creditcard.com. More than 8 percent of credit card holders carry balances over $9,000, and one in six families pay only the minimum amount due every month, which means the principal keeps building and the debt becomes harder to get out of.
All this is just the tip of the predatory capitalistic iceberg.
Vulnerable populations are often sold financial products they don’t need, are the victims of excessive fees, targets for abusive prepayment penalties, and much more. [pullquote]We will never conquer poverty or stem social unrest in this country if we continue to turn a blind eye to predatory capitalism.[/pullquote]
So why are these questionable—albeit, legal practices—not being seriously addressed?
For the same reason the housing bubble was allowed to become as big and disastrous as it became—too many people are making too much money!
The real tragedy here is that with one hand we’re asking people to pick themselves up by their bootstraps, and with the other we’re beating them back down.
Let’s be honest folks, we will never conquer poverty or stem social unrest in this country if we continue to turn a blind eye to predatory—I prefer to call it cannibalistic—capitalism. Devouring others in the pursuit of personal gain is not a good social value.
Many of the social programs we keep foisting on the poor take decades to show results, if they show results at all. The predatory practices referred to above—all of which are legal; ethical, not so much—can be mitigated almost instantly with the stroke of a pen.
A good first step would be for legislators to ban usurious interest rates and to keep these predatory industries—which, by the way, employ an army of lobbyists to influence our lawmakers—out of already vulnerable, poverty-stricken neighborhoods.
All it would take is some social and political will.
Now there’s a concept that dares not speak its name—for shame!
Larry Checco is the president of Checco Communications and a columnist for Accountability Central, where he writes on economics, politics, and income inequality. He holds a degree in Economics from Syracuse University and an MA in Journalism and Public Affairs from American University.