I wrote a book on the underground economy a few years ago. For about a decade, I observed activity in Chicago’s South Side — our current president’s backyard. I was surprised to learn about the importance of “creditors” — otherwise affectionately known as “loansharks” — who operated an informal lending network in the area. (These people are known for charging exorbitant interest rates.)
Approximately two dozen such people offered small loans to residents and local proprietors — anywhere from $25 to $5,000. The obvious advantage was that you didn’t need a solid credit history. Desperation and lack of financial services were the only requirements. The disadvantage lay in high interest rates (40 percent was not uncommon), but also in the associated penalties: contrary to popular perception, very few cases of failed payment led to physical harm. Instead, you could be forced to pay in kind — e.g., with a television set — or with food stamps and welfare checks (which also function as collateral).
I wondered whether creditors were hurting in the economic downturn. Surprisingly to me, everyone I spoke with reported an uptick in business. Indeed, they reported nearly a 30 percent to 40 percent increase in demand for their services. The reasons hadn’t changed: low-income persons couldn’t walk into a bank and acquire a loan, so the local creditor was the lender of last resort.
I asked a few of them for reactions to the financial crisis. “Imagine that your community actually had adequate services for people who needed credit,” I said. “Like banks or credit unions that provided resources. In other words, what would happen so that you could be put out of business?” Asking people to recommend against their self-interest can sometimes be a pointless task — especially if you are speaking with politicians. But the creditors provided a few interesting responses.
A Clearinghouse for Barter
Andrew said that many people promised to pay him with promises of labor.
I had this one cat who couldn’t make his weekly [payment]. He said he’d fix my car. Another dude said he would cut my hair. I got to thinking: these guys should probably get to know each other. Maybe the dude who fixes cars needs a haircut!
Andrew acknowledged that a clearinghouse for a barter economy might put him out of business. That is, people might not shop for credit, but instead look for someone who had the particular good/service they needed to purchase and then enter into an exchange. I mentioned something called “Craigslist” to him. His response alluded to something called the “digital divide.”
Timothy attributed his success as a creditor to patience with clients. “You can’t squeeze something out of folks who don’t have nothing. You got to be nice.” He said that he couldn’t afford to impose strict deadlines or pressure his clients because his entire business was local. He couldn’t simply pack up and move to another neighborhood because his operation depended on personal relationships and word-of-mouth. His empathetic ties to clients reminded me of the “originate and hold” model that banks used to follow. I found Timothy’s emphasis on niceties a bit bizarre, particularly given that his average interest rate is 30 percent; and none of the creditors said they would lower interest rates in tough economic times. So at the end of the day, I’m not sure whether decorum is in fact a recession-adjusted commodity.
Carla‘s family owns several bars in Chicago’s low-income neighborhoods. As one of only two female loansharks in the area, she started making small loans to bar patrons. She avoids men.
Women will pay back; they always do. I never have a problem with them unless they’re hooked [on drugs]. Especially when they understand that I’m here to help all the women in the community, they feel like they’re part of something.
People tend to see women as bad risks, but Carla said that their delinquency rates are far lower than their male neighbors. I posed this thesis to the male creditors; most of them smiled (in agreement, I believe), but offered no comment.
Carla also said that 75 percent of her business is a response to two kinds of local demand. First, she offers credit to women receiving public assistance who need a bridge loan until their next welfare check. They sometimes pay her back in food stamps. Second, Carla offers small “day-loans” to women who need to find last-minute babysitting. For example, their regular daycare provider may be sick and they need $20 to hire someone so they can get to work.
On numerous occasions, I had seen people’s lives get uprooted in low-income areas because they couldn’t find a few dollars to help them survive until the next paycheck. Until banks, government agencies, and philanthropists understand this situation, they will forever fail to help low- income neighborhoods.