A few weeks ago, a reader e-mailed me — let’s call him Leopold, because that’s not his real name — with some financial and debt questions. I emailed him back. Leopold responded with some additional questions and before the end of that first day, Leopold and I had spoken on the phone for what would not be the last time. There were many financial conversations that followed and I can now say that I now know more about Leopold’s finances than anyone other than Leopold.
Now, in case you are wondering, yes. He does know that I am writing this and he actually encouraged me to do so. But be warned. What is written here is not gentle of censored or even necessarily nice. In fact, you may find the depiction of Leopold to be harsh —- even cruel — at times. And it is.
Because I’m pissed off. I’m pissed off at Leopold and the stupid decisions he made. But I’m also pissed off at the parasitic institutions that have preyed upon him.
Leopold’s financial story is not one of bad luck or of extenuating circumstances. Leopold didn’t lose his job. He didn’t have his house burn down and he wasn’t hospitalized and left with huge medical bills. Leopold made bad decisions and those bad decisions were born from allowing himself to fall into the worse, the absolutely most dangerous, state that a man — or a woman — can fall into. Because once we step into this state, once we cross this line, our thinking, our options, or future —- change. And they changes quickly. And they change for the worse.
And that state is, the state of desperation.
Because once we get desperate, we get stupid.[amazon asin=B00IDHUR3W&template=iframe image][amazon asin=B00GNR2XB8&template=iframe image][amazon asin=1476739854&template=iframe image][amazon asin=1477463992&template=iframe image]
I’m going to say that again.
Once we get desperate, we get stupid.
Whether it’s financial, emotional, social, or whatever. The decisions we make when desperate are not our decisions. They are not made by us. They are made by new forces that drive and limit us.
All of this is being written now because there may not be time to write it later. Because in three days, on Friday, August 31st — or more accurately after midnight Thursday, August 30th — Leopold’s life will go from bad to worse.
He may lose everything.
It will not be a good day for Leopold.
Leopold is in his early forties. He has been married for eighteen years and has two daughters and a son. He owns a nice home. He coaches his daughter’s soccer teams and for the last nine years he has made a comfortable living selling advertising. Leopold has been enjoying the middle class American dream. However, as the economy softened so did Leopold’s earning potential.
As a commissioned salesman, four years ago Leopold had the best year he ever had and earned $153,000.
Three years ago he earned $104,000.
Two years ago he earned $82,000
And this year Leopold will earn about $52,000.
And as his income went down with his shrinking commissions, his debt went up to cover it. And for three years Leopold denied that his income was decreasing. He loved his job and refused to look elsewhere and simply wished the missing money would come back. The debt continued to pile up and when there was not enough to cover expenses, a credit card could fill in. Then a personal loan — he even took out a loan on his 401K and a home equity loan but that’s okay, soon the good times will return and he’ll earn the big bucks again. And when all outside sources were drained, when he couldn’t borrow another dime with traditional credit, he took the next step.
There are many variations of payday loans each are very creative in the way they exploit loopholes in the law.
Here is how they work.
You walk into a storefront payday loan facility — you know where they are, you see them all the time — and ask for a loan. You fill out some forms and you present your last three paystubs and your bank statement — this is important because these places do not check credit.
Why? Why would a financial institution that loans money, not care about your credit? Why would they risk losing their money?
Because they have a better way of ensuring they’ll get paid.
So, when your employment is verified, when your bank statement is confirmed, a quick calculation determines what your loan will be. Often it is between $500 and $1,000, but sometimes it can be up to $2,500 and more.
So, let’s say you qualify for $1,000.00. You agree to pay a mere $25.00 per $100 borrowed, or pay $1,200.00 next week when you get paid, for the $1,000 you borrowed this week — a mere 300% interest. And in return, you write a personal check for $1,200; the total of which you borrowed. The next week you come in and pay it all off, $1,200, or just the fee $200. If you pay just the fee, then the amount owed does not change, you write another check for $1,200.00 and you come in next week.
In this manner, you can pay $10,400 a year and still never pay down the original $1,000 you borrowed.
But why stop there? $1,000 may not make a difference in the money you need. So, once you have your first loan for $1,000, not only is there no governing group that monitors how many payday loans you take out, you are actually encouraged to take out more loans from others. In fact, many loan company’s have relationships with other loan companies — hey, you can only get $500 from us, but we have an agreement with the folks next door, go over there for another $500.
In Phase I of Leopold’s destruction —- going from store front loan to store front loan —- he borrowed, $5,900* in payday loans. In normal payments, this is a total of $24,950 in yearly payments that will only pay down a fraction of the loan.
But it gets better. If for some reason you can’t make your payment, the loan company pushes the button and cashes the check you wrote. Now an amazing transformation occurs. Now your arrangement with the company moves from a credit issue, to a criminal issue. You have bounced a check. You have probably bounced several checks. A misdemeanor. And for those check’s written over $1,000, this becomes a felony.
So, even if you walk out of the payday loan company and file bankruptcy that day, you are not protected. You are now facing criminal fraud charges.
Leopold’s paycheck this week will be $634.56. His payday loan payments alone are $1,513.
Checks will be cashed.
Like I said, this Friday, will be a very bad day.
Today, Leopold has an appointment with a second lawyer —- the first one gave him little hope. And for all of you who think that Leopold had no choice, that he had to take out those payday loans, let me leave you with this.
It is far better to bounce checks to direct payments you have made, than to take out a payday loan.
It is far better to have you cable turned off, than to take out a payday loan.
It is far better to have your credit card cancelled, than to take out a payday loan.
Once you get in bed with these guys, you never get out. Even if you take a quick loan, pay it off and walk away, the seal has been broken. And you will be back.
It’s the mob with a storefront.