Filing Bankruptcy News: Not Enough Outrage Caused by Payday Lending
A recent BusinessWeek.com article detailed the horrors of the micro-lending industry that's begun to flourish in Mexico. The article exposes the high interest rates charged to borrowers who are already struggling financially and the disastrous effects debt can have on families.
If you're thinking this story rings a bell, you're not alone.
The Mexican micro-lending denounced by BusinessWeek.com shares many characteristics with payday lending as it's practiced in the United States. That's right: the scary truth is that highly exploitative lending techniques are being practiced right here at home.
While the Mexican economy is very different from that of the United States, the relative borrowing capability of its citizens is roughly the same: it's easier for rich people to qualify for loans than it is for poor people.
And lenders have learned to profit from the ironic truth that poor people have fewer credit options than rich people, and so will pay higher interest rates for the privilege of borrowing money.
In Mexico, Banco Azteca reportedly lends money in small amounts-at an average rate of $257 per loan. In the United States, Payday lenders are doing the same thing-lending a few hundred dollars at a time to financially struggling families who have few if any other credit options.
And in both countries, the lenders are finding this practice hugely profitable. Take a look at some of the common micro-lending techniques used in Mexico and the United States:
| Lending Strategy | Mexico
(Microloans) | United States
(Payday Loans) |
|---|
| Poor families with bad credit targeted | Traditional banks cater to wealthier borrowers-for poorer families, micro-lenders are often the only source of available credit. | Shaky or limited credit history can disqualify borrowers from traditional, lower-cost loans, making payday loans one of the few options available. |
| Focus on weekly payments | No law requires lenders to disclose their interest rate (APR), and micro-lenders usually reveal only a monthly payment amount. | The "fees" attached to loans are not referred to as "interest" unless borrowers can't make payments. |
| Loans offered have deceptively high interest rates | After loans have been paid in full, interest rates commonly range from 88%-110% by U.S. standards. | Many storefront loans have annual interest rates of more than 300%, and online loans can have up to 1,000% interest rates! |
| Cycle of debt triggered | Some families turn to risky loan sharks to pay off microloans, others have their belongings repossessed by lenders. Many are unable to repay loans in full. | Many payday borrowers end up as habitual borrowers, with ever-increasing balances due and little hope of paying off their full debt. |
Even with consumer protections like personal bankruptcy and Welfare available in the United States, many families are finding themselves overwhelmed by debt incurred from payday lenders.
And, thanks to the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) passed in 2005, qualifying for Chapter 7 bankruptcy - which allows debtors to discharge much unsecured debt- is now more difficult than ever.
The BusinessWeek.com article notes that some Mexican lenders offer their employees bonuses if they convince borrowers to take out more expensive loans. This practice was common during the heyday of subprime mortgage lending, when many lenders convinced borrowers who qualified for prime loans to enter more expensive subprime agreements.
Micro-lending was once considered a non-profit tool for economic development. Today, lenders in the United States and elsewhere are making fortunes by preying on poor borrowers with few choices for obtaining credit.