The New Financial Scam Driving Workers Deep Into Debt
If you can lure people into borrowing then you own them, sometimes literally—it’s a game as old as money itself.
Regular people don’t know much about money, loan terms or the trap of debt-slavery. This enables predators to dangle loans in front of desperate people and entrap them into various forms of financial and even actual servitude. Again and again schemes and scams pop up that trick people into borrowing. Of course, we all know how the credit-card trap has ensnared millions. Car loan terms have gone from two to three and now as long as five or even six years because people think a lower monthly payment is a good thing. In recent years we’ve seen “subprime” mortgages and payday lenders entrap borrowers. Now there is a new predatory lending scheme in operation called “workplace loans.” Keep an eye out for this, it is just one more way for the financial industry to lure workers into debt slavery.
But also keep an eye out for a different form of workplace loan that can actually help employees.
Yesterday: Payday Loans
These are tough times for a large number of people. By some estimates as many as 76% of Americans are living paycheck to paycheck some or all of the time, if this is defined as not having enough savings to live for at least six months. Some surveys show that 40% of Americans have less than $500 in savings. This means they are one car breakdown away from needing an emergency loan.
These are the very people who are poor credit risks and cannot get loans from the usual sources. So they often turn to “payday lenders.” Payday loans can have an interest rate up to 500%. They charge very high interest rates for short-term loans, often trapping people into a vicious debt spiral, borrowing to pay the interest on earlier borrowing while money for food and rent disappears. These lenders charge 15% or more for a two-week loan. That’s not 15% per year, that’s 15% for two weeks.
The combination of this huge portion of Americans living on the edge, and few lending sources available, the predatory payday loan industry was at one point said to have more payday loan outlets than McDonald's and Burger King outlets combined.
Fortunately the payday loan industry is coming under scrutiny. States are cracking down on the predatory industry, the Justice Department has been issuing subpoenas looking for illegal or deceptive schemes, and in November the new Consumer Financial Protection Bureau announced its first action against a payday lender. The lender, Cash America International, Inc. will pay back up to $14 million to approximately 14,000 people for robo-signing practices related to debt collection lawsuits and will pay a $5 million penalty for the violations and other misconduct.
Today: Workplace Loans
Now there is a new game in town. It’s called “workplace loans” but in many cases they should be called “company store loans.” You may have heard stories about the old days when companies would set up company towns with company stores. You may have heard the song "16 Tons," first recorded by Merle Travis in 1946, with its line, “You load 16 tons and what do you get, another day older and deeper in debt, St. Peter don’t you call me ‘cause I can’t go, I owe my soul to the company store.”
When employees are at your mercy, as in times of high unemployment, there are plenty of ways to take advantage of them. Coal mining companies in particular were notorious for running company stores.
You could get a job mining coal, but you had to lease the equipment from the company. The company town would charge exorbitant rent for a place to stay, and the company store would charge outrageous prices for food and other necessities. All of these costs would come out of your pay. (The miners were sometimes paid in special “scrip” that could only be used to pay off what the miner owed the company.)
This new loan scheme is being promoted as a “service” by unscrupulous employers working in cahoots with predatory lenders. The employee can ask for an “advance” and the loan is included right in the paycheck. These loans are great for the lender because payments come straight out of the employee’s paycheck. The loans are terrible for the employee because payments come straight out of the employee’s paycheck.
Workplace loans have very high interest rates, as much as 165% per year, and are repaid directly out of wages. So far only about 100,000 workers are being offered these scams by their companies, but at least half a dozen companies are marketing this “service” to employers.
These loans are justified as being better than those offered by corner Payday Lenders, which isn’t saying much. The Wall Street Journal recently covered the story, in Workplace Loans Gain in Popularity:
Arizona Restaurant Systems Inc., a Scottsdale, Ariz., company that operates 28 Sonic locations in the state, allows workers to take out loans ranging from $150 to $500 that typically last two weeks.
The fees, ranging from $8 to $25 plus interest, don't go to the restaurant franchisee, but to a lender called Think Finance Inc., which makes the loans. Based on the fees, the loans carry an effective annual percentage rate of 100% to 165%.
Here’s the tipoff to the nature of this scam, from the WSJ report,
Federal and state regulators are concerned that payday lenders don't adequately disclose the costs of such loans and that the fees lenders charge may drive consumers deeper into debt. At least 15 states have laws that effectively ban payday loans.
Lenders making loans through employers are in many cases still subject to state regulations, which is why some of the firms only offer their programs in certain states. In other cases, their loans are priced low enough to comply with state laws.
That’s right, with states cracking down on payday lenders this new form of debt-entrapment is popping up, calling itself a “service.” Inc. Magazine is warning employers to “be leery” of this new scam, saying that among other problems the loans can expose the employer to a risk of discrimination lawsuits.
Some Workplace Loan Services Help Workers
Some workplace loan services are actually in the business of helping rather than harvesting workers. Companies like Emerge Workplace Solutions offer an actual alternative to the predatory loans that trap many workers in debt slavery. The company works with partner banks and credit unions to offer the employees short-term loans of up to $2500 at reasonable interest rates of 9 to 18 percent— lower than many credit cards.
Emerge is a “B Corp”— a “social mission driven business.” Emerge partners with companies and works with employees by providing financial counseling and helps them begin saving and build credit. (A good credit score enables people to borrow from banks at lower cost and for more reasonable terms resulting in more reasonable payments.) So instead of enslaving the employee with debt, they help the employee save and learn how to avoid debt.
This service helps the employee but also helps employers because it helps the employee become more stable. For example, one car breakdown doesn’t have to mean missing work and the stress of debt-slavery.
What this is all about is “debt bondage.” When a person pledges labor in exchange for paying off debt it is a form of slavery. A 1957 UN treaty called the Supplementary Convention on the Abolition of Slavery, the Slave Trade, and Institutions and Practices Similar to Slavery bans debt bondage. Specifically, article 1a bans, “Debt bondage, that is to say, the status or condition arising from a pledge by a debtor of his personal services or of those of a person under his control as security for a debt, if the value of those services as reasonably assessed is not applied towards the liquidation of the debt or the length and nature of those services are not respectively limited and defined.”
But hey, this is America, where anything is possible.
If, like so many people today, you are stuck in a low-wage job borrowing only makes things worse. Borrowed money has to be paid back, with interest. This is especially true when it is a short-term, high-interest loan to cover a shortfall from low wages. All this means is that the reason you needed the money just gets worse when the next payday comes around. Times are hard, but don’t let yourself fall into the debt trap. There is a reason it is called debt-slavery.
The right answer to problems like this is for the country to raise the minimum wage to a living-wage level so people are not constantly facing a shortage of money just to get by.
An even better solution is to implement full-employment policies where the government hires people when times are hard to do jobs like maintaining our infrastructure, taking care of children, teaching, and other things the country badly needs.