Why the Poor Pay More

Would you pay 25 percent interest on a car loan? What about a $46 fee to withdraw $300 from a cash advance storefront? If you're poor, you might have to. These astronomical fees are absurd and unfair but they're just another part of the "poverty business," a thriving economic sector that intentionally targets those with low incomes.

Counterintuitive though it may seem, poor Americans often pay more for everyday goods than their more comfortable counterparts. As the Washington Post explained last summer, inexpensive grocery stores like Trader Joe's and Costco are hard to come by in low-income neighborhoods, and often the most convenient locations for buying food are overpriced corner-store markets. (If you've ever stopped at a 7/11 for a quick bite, you can attest to the disproportionately high cost of, say, a loaf of bread or piece of fruit.) Even full-on grocery stores in poor areas tend to be pricier, just to make up for lower business traffic and per capita revenues.

Unfortunately, poor people face similar obstacles when trying to get high-ticket items like cars, computers, and houses. Plenty of companies will lend to low-income borrowers who otherwise wouldn't be viewed as credit-worthy -- for a price. Prohibiting the poor from acquiring the tools for success in our technology-driven society surely doesn't do them any favors. But the goal of the poverty business isn't to extend opportunities to the less fortunate; it's to capitalize on their poverty.

J.D. Byrider, the self-proclaimed "leading used car and finance company franchise" in America, runs 127 dealerships in 30 states. Its slogan, "Good cars for people who need credit," is appealingly simple for people pulling in only a few hundred dollars a month. Need a car? Yep. Need credit? Mm-hmm. Looks like J.D. Byrider's the perfect fit.

Such was the logic of Roxanne Tsosie, a now 32-year-old Albuquerque resident whose story was documented a couple years ago in BusinessWeek. Living almost completely off government assistance with just a high school diploma on her resume, she got a $15,000-a-year job in 2005 as a home-health-care aide. There was only one catch: that she have a car to make her rounds. When she stepped into J.D. Byrider's front office to find a cheap means of transportation, Roxanne was promptly asked to fill out a questionnaire about her personal income and spending habits. Called "risk evaluation," this process determined how much she could afford to spend on a car each month and set her payments at the highest possible rate. There's a term for that sort of "evaluation": opportunity pricing.

Roxanne was eventually forced to return her car, unable to keep up with her bi-weekly $150 payments (her agreed-upon purchase price for the car? $7,922, at a staggering 24.9% interest rate). She'd lost $900 in the process, pure profit for J.D. Byrider, which doesn't reach final payment on nearly half of its Albuquerque sales.

We see this sort of behavior in numerous credit markets, from hospitals selling patients' debts to interest-charging credit companies to private lenders targeting vulnerable college students. During the subprime mortgage crisis, we all witnessed how this system can come crashing down around us, once again hurting the poor and working classes exponentially more than the companies whose irresponsible policies caused the problems in the first place.

But as long as there's money to be made, it's unlikely that such exploitative lending will stop. "It's all motivated by self-interest, of course," maintained David Brotherton, managing partner of J.D. Byrider's Albuquerque dealership. "But we do want to help credit-challenged people get to the finish line." Stop the opportunity pricing and sky-high interest rates, and I'll believe you.

Photo credit: MBK (Marjie)