Living in America’s Fringe Economy

Ron Cook is a department manager at a Wal-Mart store in Atlanta. Maria Guzman is an undocumented worker from Mexico; she lives in Houston with her three children and cleans office buildings at night. Marty Lawson works for a large Minneapolis corporation. (The names have been changed to protect the privacy of the individuals.) What do these three people have in common? They are all regular fringe economy customers.

The term "fringe economy" refers to a range of businesses that engage in financially predatory relationships with low-income or heavily indebted consumers by charging excessive interest rates, superhigh fees, or exorbitant prices for goods or services. Some examples of fringe economy businesses include payday lenders, pawnshops, check-cashers, tax refund lenders, rent-to-own stores, and "buy-here/pay-here" used car lots. The fringe economy also includes credit card companies that charge excessive late payment or over-the-creditlimit penalties; cell phone providers that force less creditworthy customers into expensive prepaid plans; and subprime mortgage lenders that gouge prospective homeowners.

The fringe economy is hardly new. Pawnshops and informal high-interest lenders have been around forever. What we see today, however, is a fringe-economy sector that is growing fast, taking advantage of the ever-larger part of the U.S. population whose economic lives are becoming less secure. Moreover, in an important sense the sector is no longer "fringe" at all: more and more, large mainstream financial corporations are behind the high-rate loans that anxious customers in run-down storefronts sign for on the dotted line.

The Payday Lending Trap

Ron and Deanna Cook have two children and a combined family income of $48,000 -- more than twice the federal poverty line but still $10,000 below Georgia's median income. They are the working poor.

To make ends meet, the Cooks borrow from payday lenders. When Ron and Deanna borrow $300 for 14 days they pay $60 in interest -- an annual interest rate of 520%! If they can't pay the full $360, they pay just the $60 interest fee and roll over the loan for another two weeks. The original $300 loan now costs $120 in interest for 30 days. If they roll over the loan for another two-week cycle, they pay $180 in interest on a $300 loan for 45 days. If the payday lender permits only four rollovers, the Cooks sometimes take out a payday loan from another lender to repay the original loan. This costly cycle can be devastating. The Center for Responsible Lending tells the tale of one borrower who entered into 35 back-to-back payday loans over 17 months, paying $1,254 in fees on a $300 loan.

The Cooks take out about ten payday loans a year, which is close to the national average for payday loan customers. Although the industry claims payday loans are intended only for emergencies, a 2003 study of Pima County, Ariz., by the Financial services for the poor and credit-challenged are big business.

Southwest Center for Economic Integrity found that 67% of borrowers used their loans for general non-emergency bills. The Center for Responsible Lending found that 66% of borrowers initiate five or more loans a year, and 31% take out twelve or more loans yearly. Over 90% of payday loans go to borrowers with five or more loans a year. Customers who take out 13 or more loans a year account for over half of payday lenders' total revenues.

The Unbanked

Maria Guzman and her family are part of the 10% of U.S. households -- more than 12 million -- that have no relationship with a bank, savings institution, credit union, or other mainstream financial service provider. Being "unbanked," the Guzmans turn to the fringe economy for check cashing, bill payment, short-term pawn or payday loans, furniture and appliance rentals, and a host of other financial services. In each case, they face high user fees and exorbitant interest rates.