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Shortchanged: Life and Debt in the Fringe Economy (Bk Currents)

“Pawn shops, check cashers, rent-to-own stores, payday and tax-refund lenders, auto-title-loans, buy-here-pay-here used car lots – what seems to be small independent storefront operations turn out to be part of an economy dominated by well-financed corporations with little-no oversight and increasingly strong ties to mainstream financial institutions” – so claims “Shortchanged” summary material. The book then goes on to provide stories of real people trapped in perpetual debt, usually starting with overpriced goods, and acerbated by high interest rates and required extra charges.

Karger admits that serving the poor can cost more, and thus would justify higher prices. However, he cites examples of pawning a vehicle for 1/3 its value and paying interest of up to and over 300%/year to get it back, depositing 0s-,000+ in low-interest savings accounts to acquired a secured credit card that charges 30%/year rates (and more) to use, check cashers paying 3% to cash relatively risk-free government checks – and concludes that clearly the line separating “reasonable” from “unreasonable” was crossed.

Karger’s material is well-documented, providing sources for his claims – eg. “almost 10% of unbanked households’ net income is spent on alternative financial services,.” “consumer debt, excluding mortgages, averaged about ,000/family in ‘04,” “68% of EITC and CTC eligible families use tax preparers (average cost 5 in ‘01; total of .3 billion vs. $EITC payouts of billion.” However, sometimes these claims, despite documentation, do not seem to hold water – eg. Karger states that the “bulwark of public assistance programs cost 5 billion/year or less (low-income housing, AFDC and its successor program, food stamps, WIC, school lunch), compared to check cashers, payday lenders, pawn shops, rent-to-own growing billion in ‘01 – the problem is that the billion did not appear substantiated by the detail.

Information on how these purveyors of credit to the poor avoid usury laws is provided – eg. require a loan applicant to sell up to three household items to the lender, and then lease them back.

The material on home mortgages for the poor was particularly eye-opening – balloon payments, shared appreciation mortgages (due at maturity), extra insurance fees, foreclosure “help” that often takes the customer’s equity, and high interest rates (location, credit rating). Car sales (over-priced to begin with) that allow the seller to break-even in about three months, accompanied by a 30% repossession rate for “buy-here-pay-here” and frequent profitable trade-ins upon breakdown. (They even have companies that rent tires – at high fees and rates!)

Debt counselors get about 15% from money paid to credit card companies – some counseling firms are reputable and provide good service. Others steer money towards the credit card companies, neglecting home mortgage and car payments. Only 26% complete the process.

So, one wonders, if these firms are making so much money, why don’t others come in and compete down the charges. In some cases this is happening – Wal-Mart is now providing check-cashing services at far lower charges than check-cashing stores. On the other hand, there is also a problem with low-income consumers being their own worst enemies – eg. not knowing that they could cash a payroll check free at the issuing bank, or even the advantages of having a bank account. (I’m left wondering how President Bush’s privatization of Social Security would possibly avoid these people being taken advantage of.)

An excellent book, even for someone like myself who thought he knew it all already!

Shortchanged: Life and Debt in the Fringe Economy (Bk Currents) Feature

Shortchanged: Life and Debt in the Fringe Economy (Bk Currents) Overview

Shortchanged takes an uncompromising look at the corporate vultures that prey on America’s working class. Made up of pawnshops, payday lenders, check cashers, credit card companies and the like, the fringe economy entices vulnerable consumers into an economic netherworld of high interest rates and ever-increasing debt. The book examines the factors behind the fringe economy’s rise — stagnant wages, rising numbers of working poor, and the 12 million U.S. households without bank accounts — and investigates the sleazy practices — instant credit, cash-for-your-title loans, predatory mortgage lending, E-Z home equity loans — that result in phenomenal growth for the industry and a nightmare for the consumer. Powerful analysis is combined with moving personal stories of the mothers, fathers, and families whose lives have been put on the line for the perpetuation of this economy. Ruthless, compelling, outrageous, and often enraging, Shortchanged puts the spotlight on the shady side of America’s economic underbelly.

Shortchanged: Life and Debt in the Fringe Economy (Bk Currents) Specifications

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Tags: Currents, Economy, Fringe, Shortchanged