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Why poor pay high interest rates for middle-class trappings

CULLMAN, Ala. – The love seat and sofa that Jamie Abbott can’t quite afford ended up in her double-wide trailer because of the day earlier this year when she and her family walked into a new store called Buddy’s. Abbott had no access to credit, no bank account and little cash, but here was a place that catered to exactly those kinds of customers. Anything could be hers. The possibilities – and the prices – were dizzying.

At Buddy’s, a used early-model 32-gigabyte, iPad costs $1,439.28, paid over 72 weeks. An Acer laptop: $1,943.28, in 72 weekly installments. A Maytag washer and dryer: $1,999 over 100 weeks.

Abbott wanted a love-seat-and-sofa combo, and she knew it might rip her budget. But this, she figured, was the cost of being out of options. “You don’t get something like that just to put more burden on yourself,” Abbott said.

Five years into a national economic recovery that has further strained the poor working class, an entire industry has grown around handing them a lifeline to the material rewards of middle-class life. Retailers in the post-Great Recession years have become even more likely to work with customers who don’t have the money upfront, instead offering a widening spectrum of payment plans that ultimately cost far more and add to the burdens of life on the economy’s fringes.

The poor today can shop online, paying in installments, or walk into traditional retailers such as Kmart that now offer in-store leasing. The most striking change in the world of low-income commerce has been the proliferation of rent-to-own stores such as Buddy’s Home Furnishings, which has been opening a new store every week, largely in the South. Expanding rent-to-own chains in the Buffalo Niagara region include Aaron’s, Rent-to-Own and others.

In some ways, the business harks back to the subprime boom of the early 2000s, when lenders handed out loans to low-income borrowers with little credit history. But while people in those days were charged perhaps an interest rate of 5 to 10 percent, at rental centers the poor find themselves paying effective annual interest rates of more than 100 percent. With business models such as “rent-to-own,” in which transactions are categorized as leases, stores such as Buddy’s can avoid state usury laws and other regulations.

And yet low-income Americans increasingly have few other places to turn. “Congratulations, You are Pre-Approved,” Buddy’s says on its website, and the message plays to America’s bottom 40 percent. This is a group that makes less money than it did 20 years ago, a group increasingly likely to string together paychecks by holding multiple part-time jobs with variable hours.

It’s a group whose jobs, not so long ago, were more secure and better-paying; they could pay cash at Walmart and had access to more affordable credit. But today, with the excesses of the subprime boom leading conventional banks to stay away from low-income borrowers, it can be their only option. Compared with prerecession highs, the riskiest borrowers have been all but cut off from access to big loans such as mortgages, experts say.

“Basically, the market pulled back from all low-income borrowers instead of trying to figure out how to serve them,” said Michael Barr, a University of Michigan law professor and author of “No Slack: The Financial Lives of Low-Income Americans.”

Nobody wants to buy items for amounts two or three times what they would cost at a retail store. But when Abbott did her shopping in February, she did not have the money to make even a small lump-sum payment for anything of decent quality, even on Craigslist. She couldn’t buy via a layaway plan; Walmart offers that option only during the holiday season. Perhaps she could have saved up the money on her own, but whenever she has tried to do so, her stash has been wiped out to handle daily needs.

“Rent-to-own was basically all we could do,” said Abbott, 33.

The love seat and sofa retailed, together, for about $1,500. Abbott would pay for hers over two years, though she still had the option to pay monthly or weekly. The total price if paid weekly: $4,158.

Buddy’s and its larger competitors, Aaron’s and Rent-a-Center, are criticized by some consumer advocates for predatory strategies. Items are labeled with a buy-at-once “cash price” and an installment price, the weekly payments given the largest type size.

But those in the industry say they offer a legitimate service to an easy-to-overlook customer base. Customers who can’t make the payments face no penalty; because they start out as renters, not owners, they don’t face debts or credit damage if they make a return.