Credit Markets for the Poor.

Author:Scott, Robert H., III
Position::Book review

Credit Markets for the Poor, edited by Patrick Bolton and Howard Rosenthal. New York: Russell Sage Foundation. 2005. Hardcover: ISBN 0871541327, $47.50. 304 pages.

Nearly 40 million Americans are classified poor today. Worldwide there are an estimated three billion poor. Many of these people do not have access to traditional banking institutions. This creates problems when poor people want to secure loans, get access to basic credit, save effectively, and obtain competent financial advice. In the United States, due to recent stagnant real wages and increasing costs of housing, education, and medical care, too few households have enough money to pay for essential needs. Arguably, this has led to an increase in demand for credit from nontraditional institutions such as payday loan businesses. Many poor households are forced to rely on credit in times of financial distress brought about by unexpected happenstances such as job loss, car repairs, and medical maladies. In these circumstances, people eventually find access to credit, but the cost is typically high and can have long-lasting effects on a household's financial stability and well-being.

This volume is a compilation of selected papers from a conference of the same title--Credit Markets for the Poor--that took place at Princeton University in 2003. Bolton and Rosenthal have brought together interesting papers, most of which argue convincingly that many poor people live where traditional banking is not an option, or considered to be one, and when they do have access to credit it is usually expensive. The poor are susceptible to these largely unregulated fringe banks and businesses that frequently charge credit-starved borrowers high interest rates, fees, and penalties.

John Caskey's past research analyzing pawnshops and payday loans is excellent. His chapter (Chapter 2) is a brief presentation of his grander contributions to the topic of fringe banking. It clearly conveys the incorrigibility of payday loan services and how they came into existence. Payday loans are known for charging high fees and high annual rates of interest, usually ranging between 350 and 1,000 percent (p. 18). Payday loan borrowing becomes a vicious cycle by which borrowers become reliant on short-term loans. Caskey's analysis shows that many payday loan borrowers are frequent repeat customers, and because of this they suffer greatly, and over long periods from unregulated payday lenders.

Besides emergencies, poor households need...

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