Payday Lenders Are On The Prowl!

Legal Loan Sharks Or Needed Help For The Cash-Strapped?

By Paul Fain

Summer 2004

With the holidays approaching, William is short on cash. Though he has a job, he says it pays less than the one he previously held. The smaller paychecks have been rough for William, but he deliberately avoids credit cards to help him ride out budget crunches.

"Credit cards get you in trouble," he explains.

So instead, as he's done several times during the past year, William walked into the Checks Cashed in the Cherry Avenue Shopping Center, one of six payday loan stores in the Charlottesville, Va., area. After a simple process in which William signed and left behind a check for money he didn't have, he walked out with $250 in cash.

On a cold Thursday night some time later, William walked back into the bright, neon-adorned office of Checks Cashed. This time, he was holding $287 in cash, the required amount to cover his check. The extra $37 was the fee for his $250 loan.

The payday loan business is a numbers game. And when the math is done, it's clear that the house always wins. The scheme is called a "payday loan" because a borrower is supposedly getting a cash advance on his next paycheck. The practice is also referred to as a cash advance or check advance.

To get a payday loan, the borrower first must prove he has a job and an active bank account. Then, he writes the lender a check for the amount of the desired loan, which is given to him in cash. No credit check is run during the process - a huge enticement for many people. The payday lender agrees not to cash the check but keeps it as collateral until the loan and a fee are repaid.

The fee on William's loan was based on the standard $15 per $100 loan, which is the maximum fee payday lenders can charge in the state of Virginia. The minimum time period for repaying the loans is seven days. If William repaid his loan in a week, the annual interest rate would amount to a whopping 782 percent. If he waited 30 days, it would be 183 percent. Should he not repay the loan in time, he could be sued.

Despite the steep cost of his loan, William isn't complaining. He's embarrassed that he has had to resort to payday loans, refusing to give his full name to this reporter, but he defends the service.

"It's come in handy," William says.

He says his cash flow problems are temporary. "Eventually, I won't need it," William says of payday loans.

But his optimism seems unfounded. William admits to getting a payday loan at least every two months. He's obviously cash-strapped, and the mounting fees must worsen his financial headaches. Yet William claims he'll be able to escape the grasp of payday loans and fees. "I will. That's no problem," he asserts.

According to Jay Speer, a Richmond-based staff attorney for the Legal Aid Justice Center, payday loan fees force many customers like William into such a deep financial hole that they end up taking loans from one payday lender to repay the loans and fees from another. Getting a loan rolled over or extended is illegal in some states, but Speer says some people bring in cash to settle an old loan and immediately write a check to take out a new one from the same payday loan store.

"I think most people think it's a one-time thing. They have no idea that they're getting sucked into a long-term relationship," Speer says. "Once they get you, it's very hard to get out."

Consumer advocates say the payday lending industry relies on this repeat business, and it preys on lower-income and minority families, as well as on military personnel. According to a recent report by the North Carolina-based Center for Responsible Lending, 91 percent of payday loans are made to people who take out five or more payday loans per year. The report estimates that these people, whom the consumer group labels as being caught in a "debt trap," shell out $3.4 billion in fees each year.

Military Families: A Juicy Target

Military families, in fact, provide a big target for payday lenders. At Fort Bliss, Texas, for example, officials at the Army Emergency Relief office estimate nearly one-tenth of the 10,000 active duty troops stationed there have had to undergo credit counseling because of payday loans and other debt problems. Base commanders and relief offices across the country are increasingly aware of the threat payday lenders pose to military personnel.

"They¹re just all over the place," says Danita Jacobs, a senior caseworker at the Navy Marine Corps Relief Society in Norfolk, Virginia, referring to the dozens of payday loan offices that line the roads around the huge naval base in Norfolk. In one recent month, Jacobs' office saw 22 sailors or marines who had problems repaying the loans and the accompanying fees, which are usually equivalent to an annual interest rate of 391 percent or more.

"They have to use the next paycheck to pay off last week's loan," Jacobs says. "And it just keeps mushrooming."

Young soldiers and sailors are the perfect marks for payday lenders for reasons beyond financial naïveté. Though they often live paycheck to paycheck, military personnel are paid regularly, never get laid off and face penalties for failing to repay debts.

Filling A Void?

But while critics deride payday loan centers as "legal loan sharks" who drag lower-income families into a nightmarish pyramid of growing loans and fees, the payday industry paints a far different picture, claiming the service helps people avert a cash emergency. Proponents also argue that payday loans help working families rather than prey on the poor, and cite a Georgetown University study that found roughly half the industry's customers have a household income of more than $35,000 per year. Payday lending representatives claim their loans help a working family make ends meet when the car's transmission goes or when junior needs that saxophone.

"I really think that this industry is a classic example of the marketplace making a need that somebody or someone fills," says Vicki Woodward, a vice president for Advance America, a leading national chain of payday lenders.

Woodward, who also serves as the spokesperson for the Community Financial Services Association of America, the trade group that represents most of the payday loan industry, says her industry has "concern for customers who have become over-reliant" on payday loans. She says payday lenders must provide explicit descriptions of the costs and responsibilities of their loans, and that the process is designed to "give pause" to borrowers.

But this cautious atmosphere is nowhere to be seen in the ubiquitous advertisements for payday loans, which are peppered with pictures of gleeful customers holding fistfuls of cash and slogans like "quick, easy and hassle free!"

Woodward says payday lenders fill a void left by banks, which have mostly stopped offering small loans in recent years. She also cites growing charges for bounced checks, ATM machine usage and credit card late fees as reasons for growth in the payday loan industry.

Industry critics such as the U.S. Public Interest Research Group and the Consumer Federation of America issued a report showing that payday loans are far more expensive than credit cards. Calculated with fairly standard interest rates and fees, the report claims that the finance charge on a $200 credit card cash advance that is repaid in one month would be $8.41 - a yearly interest rate of 50.46 percent. At the rates available in Virginia, a $200 payday loan would include a fee of $30. The annual interest on the loan would be 183 percent.

"Credit cards are expensive, but they're still cheaper than a payday loan," says Jean Ann Fox of the Consumer Federation of America.

Not always, says Woodward of the industry group. Slinging her own math, Woodward argues that the credit card fees for a late minimum payment could be $27 for a $100 credit card balance, which could trump the payday loan fee. Woodward also cites overdraft protection fees, bounced check fees from banks and merchants, utility bill late fees and even ATM charges, all of which can charge more interest than the typical payday loan in Virginia.

Though Woodward concedes that payday advances are not always the best option, she says they are always cheaper than a bounced check, the average fee for which is $25 per check, and merchants often charge their own fees in addition to the bank.

"It's just like any other product, you have to weigh it against other alternatives," Woodward says.

"It's Quick And Easy... And They Have Neon Signs!"

William chose to drop $37 at the loan center on Cherry Avenue instead of putting the $250 on a credit card and slowly chipping away at the credit. Why?

William says he has experienced more than his share of credit card debt woes in the past. For him, a quick payday loan was a simpler option than dealing with credit cards.

Fox says this is a common sentiment among the payday loan set. Some people are in deep with credit cards or don't even have a card. Others have a bad credit rating. Perhaps most importantly, the ads for "cash now!" make payday loans seem so easy. With no nagging bills and no credit check, it's over and done in minutes.

"It's quick and it's easy and it's fast, and they have neon signs," Fox says. "Who wouldn't want to be able to write checks when they don't have money in the bank?"

Never mind that there are few scenarios in which a payday loan makes any financial sense.

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Dollars and Sense: How Payday Loans Stack Up To Other Lenders

Rate comparison for $200 credit for a 14-day loan

Type of credit	Total payment (with all fees)	Annual interest rate equiv. (%)
Typical credit card	$201.53	20
Small bank loan	$202.76	36
Typical credit card cash advance with 2.5% fee	$206.53	85
Typical credit card with $27 late payment fee	$228.53	372
Payday loan	$230.00	391
Check with $35 overdraft protection fee	$235.00	456
Bounced check with $29 bank and $25 merchant fee	$254.00	704

Sources: Community Financial Services Association of America, Consumer Federation of America, U.S. Public Interest Research Group and Virginia Bureau of Financial Institutions.

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