We have all seen the commercial starring Gary Coleman as a spokesman for the cash-advance loan company CashCall, telling you how easy it is to get a quick loan of up to $10,000 in case of an emergency.
There are people who laugh at the commercial mainly because Gary Coleman is a has-been child star turned bum.
But there are people who are strapped for cash who actually pick up the phone and make the call.
CashCall is a type of short-term lender similar to payday loan shops. They can be distinctively recognized by their eye-catching neon lights offering “EZ Money,” “Fast Cash” and “Instant Loans.”
The concept of micro-lending is simple: No credit check is required; your job is your credit. People can obtain loans by writing a postdated check to the lender that includes a processing fee.
The check is then deposited 14 days after your next paycheck.
Sounds simple right? Wrong.
The Center for Responsible Lending found that more than 5 million Americans are caught in the trap of micro-lending. These businesses are a $1.4 billion industry and are frequented by people from low-income backgrounds.
It is unquestionable that these lenders are targeting their high-interest loan products to the very people who have the least ability to pay for them.
According to the Federal Trade Commission Web site, there is a $15 fee for each $100 borrowed from payday loan shops.
Calculations show that a $15 interest charge on a $100 loan over a period of 14 days is equivalent to a 391 percent annual percentage rate.
After 14 days, a person can extend their $100 loan by paying another $15 interest charge.
This type of revolving interest rate is insane. These lenders simply mask the high-interest rate with the term “small lender’s fee.”
If people roll over three times (two months), they will owe the lender $60 on a $100 loan or an astronomical 1200 percent APR. This is what is known as highway robbery.
Aware or not, there are still a good number of people who will use the service and will continue using the service despite the astronomically high interest rates.
What is wrong with this picture? There are articles and FTC reports that have brought attention to local governments about the issue. Some cities and states have even banned high-interest lenders.
Surprisingly, consumers from these cities were willing to travel outside their cities just to find another short-term lender where they could receive advances and loans.
The business model through which these high-interest lenders are profiting from people’s mishaps is disgusting.
All this makes us wonder, when is our government going to intervene and protect its citizens with extensive laws against predatory lending?
As long as people patronize these lending businesses, they will continue to grow.
The government’s only option is to shut down high-interest lenders, both the physical retail locations and those located on the Internet.
If we’ve learned anything in recent years, it is that our government tends to take a reactive stance on issues rather than taking proactive measures to protect the interest of its citizens.
It is time for our big brothers on Capitol Hill to gain control of this problem before more low-income borrowers become scam victims.
It is time to implement reasonable rate caps and sensible limits on the number of loan lenders.
It is time for our leaders to assert responsibility over an irresponsible industry.
Yee is a fourth-year sociology student.