Roxanne Tsosie decided in late 2005 to pull her life together. She was 28 and still lived in her mother's two-room apartment in a poor neighborhood in southeast Albuquerque, N.M., known as the War Zone. She survived mostly on food stamps and welfare.
The Tsosies are Navajo, and Roxanne's mother wanted to move back to a reservation in western New Mexico where the family has a dilapidated house that lacks electricity and running water. Roxanne, unmarried and with four children of her own, could make out her future, and she didn't like what she saw.
With only a high school diploma, her employment options were limited. She landed a job as a home health-care aide for the elderly and infirm. It paid $15,000 a year and required that she have a car to make her rounds of Albuquerque and its rambling desert suburbs. A friend told her about a used-car place called J.D. Byrider Systems.
The bright-orange car lot stands out amid a jumble of payday lenders, pawnshops and rent-to-own electronics stores on Central Avenue in the War Zone. Signs in Spanish along the street promise "Financiamos a Todos" -- Financing for All. On the same day she walked into Byrider, Tsosie drove off, jubilant, in a 1999 Saturn subcompact she bought entirely on credit. "I was starting to think I could actually get things I wanted," she says.
Costly debt for allIn recent years, a range of businesses have made financing more readily available to even the riskiest of borrowers. Greater access to credit has put cars, computers, credit cards and even homes within reach for many more of the working poor. But this remaking of the marketplace for low-income consumers has a dark side: Innovative and zealous firms have lured unsophisticated shoppers by the hundreds of thousands into a thicket of debt from which many never emerge.
Federal Reserve data show that in relative terms, that debt is getting more expensive. In 1989, households earning $30,000 or less a year paid an average annual interest rate on auto loans that was 16.8% higher than what households earning more than $90,000 a year paid. By 2004, the difference had soared to 56.1%. Roughly the same thing happened with mortgage loans: a leap from a 6.4% gap to one of 25.5%.
"It's not only that the poor are paying more; the poor are paying a lot more," says Sheila Bair, chairwoman of the Federal Deposit Insurance Corp., which monitors compliance with fair-lending laws.
Once, substantial businesses had little interest in chasing customers of the sort who frequent the storefronts surrounding the Byrider dealership in Albuquerque. Why bother grabbing for the few dollars in a broke man's pocket? Now there's a reason.
Armed with the latest technology for assessing credit risks -- some of it so fine-tuned it picks up spending on cigarettes -- ambitious corporations like Byrider see profits in those thin wallets. The liquidity lapping over all parts of the financial world also has enabled the dramatic expansion of lending to the working poor.
Byrider, with financing from Bank of America and others, boasts 130 dealerships in 30 states. At company headquarters in Carmel, Ind., colored pins decorate wall maps, marking the 372 additional franchises it aims to open from California to Florida. CompuCredit, based in Atlanta, aggressively promotes credit cards to low-wage earners with a history of not paying their bills on time. And BlueHippo Funding, a self-described "direct response merchandise lender," has retooled the rent-to-own model to sell PCs and plasma TVs.
The recent furor over subprime mortgage loans fits into this broader story about the proliferation of subprime credit. In some instances, marketers essentially use products as the bait to hook less-well-off shoppers on expensive loans.
"It's the finance business," explains Russ Darrow Jr., a Byrider franchisee in Milwaukee. "Cars happen to be the commodity that we sell.