Why Does It Cost The Poor So Much To Borrow?

by Mitchell Hartman

With the Federal Reserve buying up bonds and lending at incredibly low interest to banks — trying to jam as much liquidity through the economic pipes as they’ll take — it’s now very cheap to borrow money. You’ll know that, if you’ve applied for a mortgage or a car loan lately.

But this is only true if you’re middle class or wealthy, with a very good credit score — perhaps a 700 FICO or above. If someone is poor, and has mediocre credit or little credit history — perhaps they are an immigrant or work mostly in the cash economy — then they’re likely probably paying an arm and a leg to borrow.

Nancy Yuill sees this problem every day at Innovative Changes, where she is executive director. It’s a nonprofit community lender working with low-income people in Portland, Oregon.

“Their car breaks down, they have a medical emergency, something happens in their life to threaten their financial stability — and there is no money out there,” she says. “Banks are not lending to these folks. So they have to go to the payday lenders, the consumer finance companies, or ourselves.”

Yuill’s organization offers financial counseling, along with loans of several hundred dollars, paid back over one year in manageable monthly installments. The annual percentage rate (APR) is about 28 percent (18 percent on the loan plus an origination fee). That rate isn’t low — it’s roughly on par with a Capital One credit card that a borrower with similar credit and income might qualify for. It is low, though, compared to the 100-percent-or-higher rate on a typical payday loan that is flipped a few times before being paid off.

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