Identify and explain ways that financial institutions discriminate against and exploit the poor
What will be an ideal response?
Suggested Response:
• Redlining refers to banks and other lenders identifying a deteriorating portion of a city, and then refusing to lend money for mortgages or business loans in that area.
• Another way financial agencies may discriminate against the poor is by insisting on a minimum balance of $150 or $200 for checking accounts, making it impossible for workers living from paycheck to paycheck to maintain checking accounts. Because they may not have a bank account they are forced to go to check cashing stores that may charge up to 10% of the check to cash it.
• There are fewer banks, thrifts and credit unions in low-income areas, which restricts the money made available for businesses and homeowners.
• Unable to receive standard bank loans, the poor turn to payday lenders who charge up to a 400 percent annual interest rate.
• Stores exploit their customers by having blank price tags. Customers have to ask the prices and this allows the merchants to quote higher prices.
• Stores may also pull a bait and switch by luring in customers with advertised low prices and then convincing them to by higher priced items.
• Rent-to-own businesses convince customers to pay each week to rent an item until it is paid for and then charge high interest rates and repossessing the item if a payment is missed. Pawnshops are an expensive option because the person must surrender a possession as collateral for a loan.
• Pawnshops have proliferated in recent years, with interest rates up to 20% a month—240% a year.
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