Mint.com and WallStats.com have teamed up to create a tongue-in-cheek visual representation of some dangerous predatory lending products common in America today. The image is titled The Shaft: How Some Companies Prey on the Poor.

The graphic helps depict the reality of some benign-seeming products—and highlights how susceptible many lower-income Americans are to terrible credit products, and how these financial fixes often lead to personal bankruptcy.

Payday Loans

Most people who enter payday lending shops expect the transaction to be a one-time event—which is understandable, because that’s how they’re often advertised. In practice, though, many people find themselves trapped by such loans. Here’s how:

• You take out the initial loan by post-dating a check to be cashed on your next payday. For this service, you pay a “fee,” which can be viewed as an interest rate (usually around 30 percent of the amount borrowed).
• If you have money to pay the loan in full in two weeks, you’re square.
• If you don’t have enough money to pay the amount you borrowed plus the fee, the loan “rolls over” for another two weeks. For this, you pay another fee.
• After a few cycles of falling short, it’s easy to pay more than the amount you borrowed in fees, which translates, as the image points out, into an interest rate well over 100 percent.

Payday lenders tend to affect lower income individuals as they typically have little savings to cover an emergency and few choices in terms of credit.

Rent-to-Own Stores

When you can’t afford to make a major purchase in one fell swoop, your only option may be to rent—or, more specifically to go to a rent-to-own shop and sign a contract with them. But, while this option may seem affordable in the short term, it’s usually a terrible deal in the long term:

• Items in the store have a significant markup. Most people who can make major purchases on their own don’t head into to RTO stores; the assumption is that you’ll be renting something and/or buying it gradually.
• For a set period of time, you make weekly payments and have the option of purchasing the item at its original RTO store price.
• When that period ends, you typically default into a contract that may require you to pay for insurance for the item, continue making payments over a long period of time and generally will end up costing you far more money than buying it new.
• Once you actually own an item, it’s far from new and worth much less than you ended up paying for it.

Additional Resources

Information Disclosure, Cognitive Biases and Payday Borrowing (PDF)