The New Yorker
By: Lisa J. Servon
February 18, 2014
Azlinah Tambu, a twenty-two-year-old single mother who lives in Oakland, California, recently found herself in a tough spot. Her car had broken down, and she needed it to drop her daughter off at day care and to get to work. Tambu, an upbeat woman with glossy black hair and dazzling eyes, didn't have the money for the repairs. She had no savings and no credit card; she had no family or friends who could help her. So she did what an increasing number of lower-income people do in such situations: she took out five payday loans from five different payday lenders, ranging from fifty-five dollars to three hundred dollars each. The fee to get the loans was fifteen dollars for each hundred dollars borrowed.
Tambu already knew that she would not be able to pay the loans back on time using her paychecks: she needed every dollar to pay her rent and utilities, and to buy food. Although many states allow lenders to "roll over" and refinance loans, California does not. Tambu paid back the first loans and then took out more--from the same five lenders, with a second round of fees--effectively extending the length of the first ones. When the lenders tried to withdraw the money she owed from her checking account, she did not have sufficient funds and was hit with overdraft fees that quickly mounted to three hundred dollars. Tambu paid off the overdraft charges and closed her account.
Consumer advocates argue that lenders take advantage of situations like this, knowing full well that a significant number of borrowers will be unable to repay payday loans when they come due. Because the borrowers roll over their old loans, or pay back the first loan and immediately take out another, the advocates argue, they get trapped in a cycle of debt, repaying much more than they borrowed. Those who own and manage payday-loan shops stand by the products they sell, maintaining that they are lenders of last resort for borrowers like Tambu, who have no other options.
When California borrowers default on their loans, lenders do not have much recourse to collect on the debts. Borrowers sign an arbitration agreement when they apply for a loan; the lender cannot take them to court. One of Tambu' s lenders did make harassing phone calls to her, a violation of federal law, but Tambu knew her rights. "I'm not stupid," she told me. "I knew they couldn't take me to court."
As it happens, Tambu and I met while we were working side by side as tellers at Check Center, a check casher and payday lender in a low-income neighborhood in downtown Oakland. As part of a research project designed to better understand why an increasing number of Americans use payday lenders and check cashers, I spent two weeks in October working as a teller and collections agent, calling delinquent borrowers, at Check Center. Before that, I spent four months as a teller at a check casher in the South Bronx, and one month staffing the Predatory Loan Help Hotline at the Virginia Poverty Law Center.
Tambu and I would sometimes sit in the sun on the steps outside the building during our lunch and coffee breaks. When I told her about my research, she volunteered to tell me her own story of how she ended up both giving out loans and taking them out herself.
Check Center customers were drawn to Tambu. She knew most of their names and often greeted them by asking about their children or their jobs. She took her job seriously, and she did it well. But even though her employer paid her more than the minimum wage, Tambu didn't earn enough to absorb unexpected expenses, like car repairs and illnesses.
Some analysts argue that financial literacy will keep people like Tambu from using payday loans. And, clearly, financial education is important. But comprehending your situation doesn't change your viable options. Tambu, more than most payday customers, understands that these loans can be problematic. Day after day, she deals with customers who pay off one loan and immediately take out another. "I know it's bad. I knew what a payday loan was," she told me. "But I'm on a month-to-month lease, and it was either get evicted or take out the loans." Although the neighborhood where she lives is dangerous, Tambu is currently settled into "the best apartment I've ever had." She didn't want to risk losing her home by failing to pay the rent. "If you think this is bad," she told me, gesturing at the area surrounding Check Center, where drug dealers hung out in front of the store and bullet holes riddled the storefront, "you should see where I live. It makes this place look like Beverly Hills."
Researchers, journalists, and policymakers routinely demonize the businesses that provide payday loans, calling them predatory or worse. Indeed, if you are not living close to the edge, it's hard to understand why a person would pay such a high price to borrow such a small amount of money.
To date, the debates about payday loans have focused almost exclusively on the supply side of the issue--the payday lenders--and not enough on the demand side--the borrowers. Lately, though, the body of research into the latter has been growing. A recent report by the Center for Financial Services Innovation highlights several categories of small-dollar credit borrowers. Tambu is not representative of the entire payday market, but, according to the center's research, borrowers seeking loans because of an unexpected expense represent thirty-two per cent of the over-all market. Policy recommendations, however, focus almost exclusively on regulation of the industry, rather than on the conditions that lead people to seek out small, expensive loans in the first place.
To be sure, some payday lenders engage in abusive practices. During the month I staffed the Predatory Loan Help Hotline operated by the Virginia Poverty Law Center, I heard plenty of stories from people who had been harassed and threatened with lawsuits by businesses that routinely flout existing regulation.
Indeed, even those who work in the industry acknowledge that these loans are imperfect solutions to the growing demand for small loans. John Weinstein, a third-generation check casher and the president of Check Center, told me that he recognizes the problems (pointed out in a series of recent Pew reports) associated with repeat borrowing. Weinstein believes that "changes in the industry are inevitable."
But when I staffed the window at Check Center, I was instructed to urge customers to take out the smallest possible loans that would serve their needs. And before I worked the phones as a collections agent, I was required to read the Fair Debt Collections Practices Act, which limits what lenders can say and do in the process of attempting to get borrowers to repay their debts.
Demand for small-dollar loans may be rising partly because of the growing availability of payday loans. But a more significant factor seems to be that an increasing number of people are unable to make ends meet. Real wages have declined significantly since 1972, and more than a quarter of people in the U.S. have no emergency savings whatsoever. The demand for payday loans remains because the wages of these Americans are not sufficient to pay for basic needs, much less put something aside. Meanwhile, mainstream financial services have all but abandoned low- and moderate-income groups. And the incentives that enable higher-income earners to save and invest are nonexistent for those with lower incomes.
Ultimately, Tambu worked out repayment plans with her lenders that allowed her to pay them back in installments. In order to make the payments, she took a second job working in the middle of the night at a bar two doors down from Check Center. She told me that she paid off "a big chunk" of her loans but then had to quit her job; the hours were too tough on her, and she didn't see her daughter enough. Still, she told me, "I might go back. I really need the money."
The last time Tambu and I talked, she told me about a job she had recently started, working at a veterinary hospital. "This is a career--a real job," she told me. Tambu hopes that she will eventually be able to set aside twenty-five dollars from each paycheck, and perhaps begin to take classes at a local college to work toward a degree in counseling.
Tambu is still paying back the loans she obtained to fix her car last summer, visiting each of her five lenders on Wednesdays, her payday, and paying them twenty dollars each. When I asked Tambu whether, given her experience, she thought payday loans should be illegal in California, as they are in New York, she told me, "No, I think they should still exist. You know it's undoable to take out five loans and be able to pay them back. But sometimes you have no choice. The reason I'm working so hard to pay these loans back is that I want to be in good standing, in case I ever need another one."