Wednesday, December 02, 2015

Debt Bondage 2.0: Pay Day Loans & Cash Advances

Modern day slavery exists right under our noses. Short term lending is one such example. It prays on the desperate – and often financial illiterate – who have no way out. The pay day loan industry presents itself as a good samaritan. Don’t be fooled. They are loan-sharks who pray on the weak. After all business is business.

female debt collector in Singapore
A different kind of menace. Female debt collector in Singapore (Image: Herworldplus)


A small loan, you pay back in a few weeks time, it seems so convenient. You need money now. What else can you do? Most customers have no idea just how much they have to pay back later. In part the industry relies on this. These loans come with high interest rates. Then there are the fees. Loans spin out of control because of the combination of these combined with hidden charges.


How it works
Take out 100. After one month you owe 110. Seems fair. You are desperate for the money anyway. You also have to pay a “small” admin fee of 15 upfront. That might be a problem if you have no friends to help you out. The company kindly offers to take it out of the 100 they lend you. Now it starts to get nasty. They hand you 85 and in 30 days you have to pay back 110. Rather than 10 percent interest for one month, it jumps to 30 percent for 30 days (110/85).

Of course 10 percent interest for one month is insane by itself. If you pay interest on over the interest you already owe, that makes for an annual interest rate of over 300 percent. Keep it up for a year and you have to pay back four times the amount you lent. Once for the money itself and three times for the interest on it. Many people don’t know.

One month later, most clients don’t have the money to repay, so they roll over the loan for one more month. Most loan sharks are happy to oblige. Often for a small fee – admin expenses, check clearing – that they tack on to your bill. Some are a little bolder and bluntly say because you cannot repay, your credit rating has worsened. They are still happy to help, albeit at a slightly higher interest rate. With nowhere to go, you agree and often enter a spiral of neverending debt.  Debt bondage is a better word.


An example
You lend 100 at 10 percent per month. The initial fee is fifteen. After one year you owe 313. The interest rate is over 200 percent.
If you don't have money for the initial fee and finance it you still owe 313, but  you effectively paid 269 percent interest, because they gave you only 85 cash in hand. It is one of the tricks the industry uses to hide how expensive quick cash really is.
If your shark lender also charges a roll-over fee of 5 each time you renew, the amount you owe at the end of the year is 478 (APR is 378%). It keeps going up.
Greedy as they are, if on top of that they raise your interest rate because you cannot pay back the money you owe from 10 to 15 percent, the amount due at after 12 months almost doubles to more than 700. And yes that is over 600 percent in one year. Findommes call it rinsing the pay pig. Very few people can afford such extortionate interest rates.

How much do you owe after one year? Note the difference in nominal terms and as a percentage. Still, debt bondage either way.

The annual interest rate can be calculated in various ways. According to one one specific calculation APR can be as high as four digits.


History repeats itself

In Classical Antiquity, people placed themselves “voluntary” into debt bondage, to avoid being enslaved outright, was quite common. There was little difference between the two of them. Each option forced the debtor to work, a form of endentured labour. Debt bondage has persisted through the ages and was officially abolished in the 1950.

It still exists. Even in our Western world. In today’s society, loan sharks will bleed you dry if they can. They let you build up a debt you cannot repay. Nor do they ever expect you too. You’ve reached the point of no return and are effectively in debt bondage. The company you owe money to, manages you as an asset. They manage their debtors carefully the make the most of their investment. Your creditor leaves with just not enough to make it to the next month. Then they collect again. When they’ve wrung every last penny out of you, they sell your debt at a steep discount to someone else. Companies that buy such claims know exactly what they pay for. Their specialty is to wring that last penny out of you. Because there always is. They will use every method at their disposal. No remorse and often with disregard for the law. They will ruin your life. Not for 15 pieces of silver, but for a single penny.


A way out?
For many people there is no way out. Whatever you steps you take to clean up your financial situation, begin with taking the emotion out of it. That is difficult, but also the only way. Pay day loans, short term cash advances or whatever they are called are nothing but predatory lending. The industry sells you an evil illusion of easy, convenient and affordable credit. It doesn't exist. I briefly looked at the wiki on this topic, but it seems heavily redacted in favour of the lending industry.

Secondly, do it now. Get a third job. Bite the bullet, sell your stuff or whatever. Yes, you loose a lot of money when you sell items, but once you’re out of debt, that is the end of it. After that you can go on with your life. If not and you roll over your cash advances, one day you will be refused credit. The loan sharks have bled you dry – which is exactly what some companies intend. The final step is to sell your debt to a collection agency at a discount. End of the line.


Secret
Don’t believe me the pay day industry is about day slavery and indentured servitude? Perhaps that is because the industry makes good money that pays for the best lawyers PR people and and can pay for excellent lawyers, PR people and spin doctors that not only influence legislation but also frame what in effect is modern day slavery in the Western world as something more benign. The pay day industry presents itself as the good samaritan that is willing to help you against the odds, when no-one will. Now you know why.

heavy metal shackles
December 02 is International Day for the Abolition of Slavery.
A reminder for us kinky people about the ugly truth of real world slavery.

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