Friday, October 17, 2014

The high cost of being poor


The only guarantee about being poor is that you will most likely remain poor. In part this is because you will have poor options that will direct you into making poor choices. Rent to Own is one area of guaranteed poor choices.
The poor today can shop online, paying in installments, or walk into traditional retailers such as Kmart that now offer in-store leasing. The most striking change in the world of low-income commerce has been the proliferation of rent-to-own stores such as Buddy’s Home Furnishings, which has been opening a new store every week, largely in the South.

In some ways, the business harkens back to the subprime boom of the early 2000s, when lenders handed out loans to low-income borrowers with little credit history. But while people in those days were charged perhaps an interest rate of 5 to 10 percent, at rental centers the poor find themselves paying effective annual interest rates of more than 100 percent. With business models such as “rent-to-own,” in which transactions are categorized as leases, stores like Buddy’s can avoid state usury laws and other regulations.

And yet low-income Americans increasingly have few other places to turn. “Congratulations, You are Pre-Approved,” Buddy’s says on its Web site, and the message plays to America’s bottom 40 percent. This is a group that makes less money than it did 20 years ago, a group increasingly likely to string together paychecks by holding multiple part-time jobs with variable hours.

It’s a group whose jobs, not so long ago, were more secure and better-paying; they could pay cash at Wal-Mart and had access to more affordable credit. But today, with the excesses of the subprime boom leading conventional banks to stay away from low-income borrowers, it can be their only option. Compared with pre-recession highs, the riskiest borrowers have been all but cut off from access to big loans, like mortgages, experts say.

“Basically, the market pulled back from all low-income borrowers instead of trying to figure out how to serve them,” said Michael Barr, a University of Michigan law professor and author of “No Slack: The Financial Lives of Low-Income Americans.”

Nobody wants to buy items for amounts two or three times what they’d cost at a retail store. But when Abbott did her shopping in February, she didn’t have the money to make even a small lump-sum payment for anything of decent quality, even on Craigslist. She couldn’t buy via a layaway plan; Wal-Mart offers that option only during the holiday season. Perhaps she could have saved up the money on her own, but whenever she has tried to do so, her stash has been wiped out to handle daily needs.

“Rent-to-own was basically all we could do,” Abbott, 33, said.
Her one choice was a bad choice and she will pay for it unless the payday lender gets all her money first.

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