When Helping Hurts: How to Alleviate Poverty Without Hurting the Poor . . . and Yourself

by Steve Corbett

Isaac, an African American in his late twenties, drives up to Title Brokers in a rusting minivan that needs a new muffler. In exchange for handing over his car title and a set of keys for the repo man, Isaac receives a check for $600. At the end of the month, he will owe $750, which amounts to an annual percentage rate (APR) of 300 percent. Should he fail to repay within ninety days, he will owe $1,172, reflecting an APR of 381 percent. “If I wasn’t in such a desperate situation, I wouldn’t come back. I’m embarrassed to be here because these guys rip people off. This is [money] I should be investing for my children.”17 Isaac’s story is becoming all too common. Poor neighborhoods are teeming with mortgage brokers, rent-to-own stores, payday and tax refund lenders, pawnshops, and car title loan dealers, all of which charge very high interest rates, often burying people in a cycle of debt. For example, a two-week loan of two to three hundred dollars from payday lenders charges interest averaging more than 400 percent APR, and the majority of payday borrowers have to roll over their loans multiple times, incurring additional fees in the process. The average payday borrower spends $800 to repay a $325 loan.18 Many poor people do not understand the terms of the loans from these sources, leaving them open to abuse from unscrupulous lenders, many of whom engage in outright fraud. Indeed, research has found that a lack of financial education significantly contributes to people’s fa...