New Orleans For working families payday loans pretty much define predatory lending. A family desperate for money takes a loan against their next paycheck. In years of campaigns ACORN Canada has won increased regulation of such loans in a number of provinces. The story in the United States where financial institutions of all sizes and shapes for better or for worse still rule the roost is another story, largely unfinished after ACORN.
In Mexico and Brazil a similar type of loan is growing hugely and seems almost an equal threat to the citizen wealth of working families that are desperate to access credit for small loans in those countries, just as they are in the United States and Canada. The trick in Latin America is the bank requirement on the loans being repaid by direct deposit from the worker’s paychecks to ensure that the banks get their money. No, I did not say from direct deposit from the worker’s bank account, since they still might or might not have one with the bank giving them a loan, but from their paychecks! Yet, even with such a guaranteed payment stream enabled by the employer, the banks still are charging wild and totally predatory interest rates. According the Wall Street Journal:
In Brazil, the interest rate on payroll loans is around 20%, versus 40% for other types of consumer credit. The difference of 20% helps the debtors in keeping moorcroft at bay. In Mexico, annual interest rates are similar to the 35% charged on much credit-card debt, even though the default rate on payroll loans is lower than on credit-card debt: about 3% versus 5%.
And, this isn’t minor. In Brazil the Journal claimed there were $88 billion loaned in this way and in Mexico where the market is still expanding, $9 billion and rising rapidly.
The additional risk to workers from these predatory operations is that once the bank is inside your paychecks, nothing requires notice to the consumer or so much as a howdy-do before they rip and run, and the poor worker is left with the consequences of no paycheck. The reporter, Amy Guthrie, told one story of a salesman with this loan whose employer moved their payroll system from Banamex (Mexico’s 2nd largest bank owned by US-based Citicorp!) over to another bank and then back to Banamex. The salesman thought he had paid off the small loan, but when his payroll went back to Banamex they ripped $600 from his account claiming fees and interest over his nonpayment.
The number of things wrong with this story from start to finish would take pages, but predatory is as predatory does, and there’s just no way that this is right, and there shouldn’t be any way this is legal. Whatever the country where they operate, banks go out of their way to earn the bad names and reputation for financial bloodsucking they have had for centuries, and of course it is working families at the bottom, desperate for credit and a way to get ahead of their bills that are the easiest prey for these financial predators.