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The High Cost of Poverty: Why the Poor Pay More
Just then, Lenwood Brooks walks out of the check-cashing place. He is angry about how much it just cost him to cash a check. "They charged me $15 to cash a $300 check," he says.
You ask him why he didn't just go to a bank. But his story is as complicated as the various reasons people find themselves in poverty and in need of a check-cashing joint. He says he lost his driver's license and now his regular bank "won't recognize me as a human. That's why I had to come here. It's a rip-off, but it's like a convenience store. You pay for the convenience."
Then there's credit. The poor don't have it. What they had was a place like First Cash Advance in D.C.'s Manor Park neighborhood, where a neon sign once flashed "PAYDAY ADVANCE." Through the bulletproof glass, a cashier in white eyeliner and long white nails explained what you needed to get an advance on your paycheck -- a pay stub, a legitimate ID, a checkbook. This meant you're doing well enough to have a checking account, but you're still poor.
And if you qualify, the fee for borrowing $300 is $46.50.
That was not for a year -- it's for seven days, although the terms can vary. How much interest will this payday loan cost you? In simple terms, the company is charging a $15.50 fee for every $100 that you borrow. On your $300 payday loan -- borrowed for a term of seven days -- the effective annual percentage rate is 806 percent.
The cashier says that what you do is write First Cash Advance a check for $345.50 plus another $1 fee, and it will give you $300 in cash upfront. It holds the check until you get paid. Then you bring in $346.50 and it returns your check. Or it cashes the check and keeps your $346.50, or you have the option of extending the loan with additional fees. You'll be out $46.50, which you'd rather have for the late fee on the rent you didn't pay on time. Or the gas bill you swear you paid last month but the gas company swears it never got.
But now the payday advance place has closed, shuttered by metal doors. A sign in the front door says the business has moved. After the D.C. government passed a law requiring payday lenders to abide by a 24-percent limit on the annual percentage rate charged on a loan, many such stores in the District closed. Now advocates for the poor say they are concerned about other businesses that prey on poor people by extending loans in exchange for car titles. If a person does not pay back the loan, then the business becomes the owner of the car.
All these costs can lead the poor to a collective depression. Douglas J. Besharov, resident scholar at the American Enterprise Institute, says: "There are social costs of being poor, though it is not clear where the cause and effect is. We know for a fact that on certain measures, people who are poor are often more depressed than people who are not. I don't know if poverty made them depressed or the depression made them poor. I think the cause and effect is an open question. Some people are so depressed they are not functional. 'I live in a crummy neighborhood. My kids go to a crummy school.' That is not the kind of scenario that would make them happy." Another effect of all this, he says: "Would you want to hire someone like that?"
The poor suspect that prices are higher where they live, even the prices in major supermarkets. The suspicions sometimes spill over into frustration.
On a hot spring afternoon, Jacob Carter finds himself standing in a checkout line at the Giant on Alabama Avenue SE. Before the cashier finishes ringing up his items, he puts $43 on the conveyor belt. But his bill comes to $52.07. He has no more money, so he tells the clerk to start removing items.
The clerk suggests that he use his "bonus card" for savings.
Carter tells the clerk he has no such card.