My friend Gustav and I laid out the hottest new place to get a payday-style loan, sometimes in just minutes: Reddit. In The Atlantic, we explain how an ad-hoc community of online lenders Paypal money to strangers based on their forum posts, and most of them get repaid.
When asked if they’d be able to cover a $400 emergency expense, Neal Gabler’s recent Atlantic cover story noted, nearly half of all respondents to a 2014 Federal Reserve study said that they wouldn’t have enough cash on hand.
So how would they scrape the money together? Most told the Fed they would try for a bank loan, use a credit card, or make a potentially embarrassing request to family and friends. Two percent of respondents said they would take out a payday loan.
To avoid this suite of unattractive choices, some borrowers are asking strangers for money on Reddit instead. Since 2011, a section of the site, r/borrow (and its predecessor, r/loans), has matched users looking for quick credit with lenders willing to put up cash. Most loans on r/borrow charge very high interest rates—usually between 10 and 25 percent, to be paid back over weeks or months. Per data collected by one r/borrow user, the subreddit facilitated 3,473 loans totaling over $780,000 in 2015. According to a moderator of the subreddit, r/borrow users, like Redditors at large, skew young, white, and male. Loans tend to range from $100 to a few thousand dollars, and cover the gamut of emergency financial needs, including car repairs, debt consolidation, medical bills, or unexpected travel costs.
Relatively speaking, these aren’t huge numbers—the consumer-credit market handles trillions of dollars each year—but they do highlight the ways in which traditional lending options can fail to give some people what they need. “It’s not surprising that borrowers are looking for alternative ways of getting access to credit,” says Paul Leonard, the former director of the California office of the Center for Responsible Lending.
When Americans need money, they often turn first to banks for a loan, but their options there are only as good as their credit. If their credit score—a figure that can be calculated incorrectly and yet is often taken as the sole indicator of a prospective borrower’s reliability—is low, they often turn to loans with much higher interest rates. Take Justin O’Dell, a cable technician living in Dexter, Michigan. He says his mother took out several credit cards in his name while he was in college and racked up about $40,000 in debt. “My choices were to press charges for credit fraud or eat the debt,” he said. “I ate the debt.” No longer able to get student loans, O’Dell was forced to drop out of college.
When O’Dell later needed some cash to pay his cellphone bill after his wife lost her job, he briefly considered a payday loan—an extremely high-interest alternative that is known to catch consumers in cycles of debt and is mostly unregulated in 32 states. (Payday loans are not equal-opportunity debt traps, either: “There is some evidence that lenders have concentrated themselves in communities of color,” said Joe Valenti, the director of consumer finance for the Center for American Progress.) But after deciding against that option, and against the embarrassment of asking his father, O’Dell ultimately opted for the comfortable distance of a Reddit loan. “You don’t have to walk back to dad with your tail between your legs and ask for help,” he said. Now, he turns to Reddit when surprise expenses arise.
The full story here.
My big one is out today in The Atlantic, on Michigan’s emergency manager law and the residents suing to overturn it. A taste:
The suit highlights the paradox of American municipal governance. Local government is deeply ingrained in the ethos of American democracy, from colonial-era New England town hall meetings to New York City’s experiment with people-powered budgeting. But it is not an inalienable right. The U.S. Constitution guarantees all states a “republican government,” but gives states power to grant — or not grant — home rule to municipalities.
Governor Rick Snyder, a Republican, contends that the state has an obligation to make sure local governments are on solid fiscal footing. Despite the demographic disproportions in the affected cities, it’s unlikely that discrimination has motivated the governor’s EM appointments. The areas under emergency management are some of Michigan’s largest clusters of concentrated poverty, ravaged by decades of deindustrialization.
Discrimination aside, the Michigan appointments — whether constitutional or not — set a troubling precedent by curtailing local representation in the state’s most chronically impoverished cities.
Read the whole thing.