Shortchanged: An Analysis of Predatory Lending in the Fringe Economy, Papers of World History

Download Shortchanged: An Analysis of Predatory Lending in the Fringe Economy and more Papers World History in PDF only on Docsity! Brandon Todd HIST 6393, Spring 2007 Karger, Howard. Shortchanged: Life and Debt in the Fringe Economy. San Francisco: Berrett- Koehler Publishers, Inc, 2005. With Shortchanged, Howard Karger has painted a compelling portrait of life in the fringe economy. For people who live at or below the poverty line, or people who fall dangerously into debt or have bad or no credit, life in the fringe is a nearly inescapable trap of high interest rates and predatory lenders. Shortchanged analyzes in detail the many various financial pitfalls of the fringe and in general gives the reader and overall feeling of despair with regards to the unfortunate families forced to live under these conditions. Karger describes the “fringe economy” as “corporations or business practices that have a predatory relationship with the poor by charging excessive interest rates or fees, or exorbitant prices for goods or services.” For most of the people forced to deal with the fringe economy, they do so because it is the only option. Most have bad or no credit and insufficient funds to start a bank account and pay bank fees. With traditional banking services closed off, that leaves only lenders willing to give our high-risk loans at a high interest rate. On the surface, higher interest rates for higher risk loans makes perfect logical sense. After all, lenders have to protect themselves in the eventuality of a default. However, as Karger discovers, on the fringe economy, interest rates often exceed by several times the rate necessary given the risk. Over the course of several chapters, Karger examines the more common fringe services- payday advance loans, check cashing services, pawn shops, subprime mortgage lenders, used car lots, etc. Throughout all these various businesses, a common thread connecting them all is the lender’s desire to string the payments along for as long as possible. Paying off the principle of a loan is the last thing that any of these businesses want. Credit Card Issuers (CCIs) come Todd-Karger.doc - 1 - immediately to mind as an example of this type of practice. CCIs, usually a bank (not VISA, et al), issue a line of credit to the customer, with payment being due at a set time each month. However, the payment that is due is a minimum monthly payment, not the full amount of charges up to a person’s credit limit. The CCI then charges interest on the balance based on a set rate, sometimes as high as 20%-30% for customers with bad credit scores. Karger argues that in an ideal situation, the customer would only make a monthly payment large enough to pay off the interest earned on the balance, thus multiplying the total amount paid many times over. If a customer pays off the monthly balance completely each month, the worst kind of customer for a CCI, the CCI will often begin charging annual fees to make at least some money off of the customer. This type of lending practice, offering minimum payments well below the amount owed and charging extremely high rates on the balance, is common among all fringe lending businesses. Another common theme discovered by Karger involves the idea of high interest rates for high-risk loans. Nearly all lending organizations charge a higher rate on a loan that is, in there opinion, less likely to be paid off. If the borrower defaults on the loan, the lender will have collected more interest on the portion of the loan that was paid off, thus decreasing their losses. However, Karger argues that fees and interest rates in the fringe economy wildly exceed those normally expected for the given risk. The most glaring example comes in the form of pawn shops. Pawn brokers collect collateral in the form of household items-appliances, jewelry, etc.- in exchange for a loan. Along with the loan, the borrower is given a pawn ticket for their item. After a month, the borrower either pays back the loan and redeems the pawn ticket for their item or pays a fee to extend the loan term. If neither of these options are exercised, then the item goes on sale in the pawn shop, at a price greater than the loan amount. The fees associated with pawn Todd-Karger.doc - 2 -