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Archive for Sunday, April 30, 2006

Payday loans deepen debt

Borrowers warn quick fix can lead to financial woes

April 30, 2006

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At 9:30 a.m. Wednesday, the gas gauge on Marty Jo Brave Bull's pickup truck was on empty. She didn't have the money to fill it up.

So she pulled into Quik Cash, a storefront at 1401 W. Sixth St., walked up to a window inside and said, "I need to make a loan."

It's a scene that plays out daily in Lawrence and across the state, as a growing number of "payday lenders" set up shop promising quick, short-term loans to get people like Brave Bull, 45, through to the next paycheck.

"That option is the bottom," she said. "It's basically my last straw."

Critics of the payday-lending business say the fees it charges are unreasonably high. They say it exploits people who already are in financial trouble, putting them on a treadmill of debt that prevents them from resolving the issues that got them there in the first place.

But those in the business say they're simply filling a need, and that most customers are moderate in their borrowing habits.

"We don't intend to offer these products in a parental kind of way," said Tom Linafelt, a spokesman for Overland Park-based QC Holdings, one of the 10 largest payday-loan companies in the country. "We trust our customers to make their own financial decisions. We don't want to baby-sit them. We want to serve their financial needs."

Downward spiral

Matt P., a 31-year-old Lawrence resident who spoke on condition that his last name not be used, is an example of what can go wrong with payday loans. He said he first took out one of the loans in 1999, when he borrowed $100 with $15 in interest tacked on.


Payday Loans teller Stephanie McCullough, Shawnee, receives paperwork from a customer taking out a loan Friday afternoon at the 1401 W. Sixth St. location in Lawrence.

Payday Loans teller Stephanie McCullough, Shawnee, receives paperwork from a customer taking out a loan Friday afternoon at the 1401 W. Sixth St. location in Lawrence.

"The first time you go in one of these places, they're very nice," he said. "They explain to you how much you can take out. They hold the check for two weeks and then you're allowed to either have it taken out of your account or you pay them cash."

But soon he began taking out loans from one lender to pay off an existing loan at a different business.

"You take out one to pay off another. It just spirals downhill," he said. The cycle continued until he eventually reached $6,000 in outstanding payday loans from 17 different lenders in Kansas and Missouri - something he was able to pay off completely just earlier this year.

Matt said he got in trouble with "buydowns." Those are partial repayments that allow the loan to be extended. They're illegal in Kansas, but not in Missouri, where he often took his business.

"I'm living proof that if you need money, go look to your family. Look to people you know," Matt said. "That's not the place to go. ... They open up in places where people are very desperate. It is a quick fix for them. It was a quick fix for me."

Booming business

The payday-loan industry emerged in the 1990s as traditional lenders withdrew from the market for very small loans. Unlike other consumer loans, payday loans are made in single payments, and the loan is typically issued without a credit investigation. One study states the industry grew from virtually zero offices in 1990 to more than 10,000 in 1999. Today, there are about 22,000 nationwide, with 365 in Kansas.

More and more of the transactions are being done through the Internet. Companies from as far away as Europe- some of which are unlicensed - offer the loans to Kansans electronically through bank withdrawals.

"It's always amazing to me that a person would give out that information blindly over the Internet, which I would encourage no person to do," said Kevin Glendening, administrator of the Kansas Uniform Consumer Credit Code.

Glendening said many payday lenders in Kansas are legitimate, but some are not. One of the most common abuses involves illegal fees, he said.

For example, a company operating through the Internet might repeatedly submit an electronic demand for payment on an account with no funds, using the threat of repeated "insufficient funds" bank charges as leverage to get the customer to take out more loans.

"That's just one example of the sort of egregious behavior we have come across," he said.

The nonprofit group Consumers Union says the rapid growth of the industry suggests that it's a low-risk, profitable business to be in- and that, given that, the high interest rates aren't justifiable.

After all, the $15 fee tacked on to a $100 loan amounts to a 391 percent annual percentage rate.

"Critics of the industry like to talk about the high APR. I think that's the biggest complaint that we hear over and over again," said Lyndsey Medsker, a spokeswoman for the Community Financial Services Assn., a Washington, D.C.-based trade group. "It's misleading, because yes, by law they have to disclose it as an APR, but it's a two-week loan."

'My godsend'

A 2001 study by Georgetown University- one often cited by Medsker's organization - suggests someone like Matt P. is an atypical customer of payday-loan shops.

Most of the people surveyed in the study were found to use the loans infrequently or moderately, but 22.5 percent said they had taken out 14 or more loans in the past year. Also, 16.5 percent had paid off one company with proceeds from another company, according to the study.

The "Heart of the Working Middle Class" is who typically uses the loans, according to documents from the trade group. All customers have checking accounts and all have steady incomes, which are required to take out a loan, the group says.

But those are just the official numbers. Brave Bull, for example, said she has a checking account on file with the local Quik Cash saying she earns good money working at a garage door company. It doesn't matter, she said, that the checks she floats to write the loan are on an account that is no longer open, and that she left the higher-paying job long ago.

She said she senses that the people at the business prefer to be paid in cash rather than having to run a check that might bounce. That, she said, would eliminate a regular customer.

On this day, Brave Bull forgot her checkbook, so she ended up not taking out the loan and instead borrowed some money from her ex-husband's mother. But, she said, she'll probably be back.

"This is my godsend sometimes," she said. "I go there because I feel comfortable with them. I'm not looking at suits. I'm not looking at uppity-ups."

Comments

james bush 8 years, 7 months ago

Try joining a credit union..........1 percent per month on the unpaid balance with no minimum payment beats 3 percent/mo ( that's what I remember the legal rate was long ago when I needed payday loans).

sd123 8 years, 7 months ago

$15.00 on $100.00 seems a little steep, but the banks charge $25 or more on a bounced check. And these days, the checks reach the bank before the ink dries on them. So, for folk who just need to "float" for a few days before pay day, I'd say this is a pretty good option. Borrowing from friends and family usually causes a lot of headaches.

grubesteak 8 years, 7 months ago

Here's a novel idea ... how about just saving up some money and getting on a budget?

conserv26 8 years, 7 months ago

With gas prices at their current rates and other incidental costs continuing to rise with inflation couple with no significant pay raises in years, I can see why people are struggling and seek payday loans. You can budget all you want, but when it costs $40-80 for a tank of gas and you are a commuter, how are you supposed to budget for that? Most people did not expect gas prices to double in the past 5 years and I know that my salary has not been increased to compensate so maybe it is not just poor financial management. When you must decide whether or not to buy gas or eat, I think you may find a payday loan to be the only option. Also pawn shops are seeing record business as of late. If you are independently wealthy I guess it doesn't matter, but the middle class are really struggling out here...someone needs to do something NOW!

Godot 8 years, 7 months ago

Another rip off scam similar to payday loans is the "pawn your car" business. Some desperate people will pawn their cars for a few hundred bucks, at a rate of 7% per month. That is 84% per year, simple interest. The problem is, it compounds. For many people, it takes them longer than a month to come up with the money to get their cars back, and they have to come up with 2 or 3 times the amount of the loan. Many cannot afford to get their cars out of hock, so, basically they have, by default, sold their cars for a fraction of their worth.

I have a family member who is in this business, and I find it extremely distasteful. When I argue with him about the immorality of it, he claims he is providing a service to people who otherwise cannot get loans, and if they are stupid enough to do it, it is not up to him to set them straight.

gphawk89 8 years, 7 months ago

If you can't afford to pay for it, don't buy it. Save up until you can.

Godot 8 years, 7 months ago

I wonder how many people who get the payday loans still subscribe to cable and have cell phones?

Unknown30 8 years, 7 months ago

I used to work at a payday loan joint. Not the best job I ever had, for sure, but it was a real eye-opener. And, I worked this job right after I worked as a bank teller for a few months!! Everyone should know that the payday loan industry really doesn't do anything that banks haven't already done, or aren't currently doing. In fact, the payday loan industries' entire business model was built on the banking/loan system - specifically the "returned check fee" process. And this is the real reason that banks hate them - not because they represent the "lower" classes, but because they ultimately cut into the bottom line. THE BANKS ABSOLUTELY HATE SEEING MONEY LEAVE THEIR HANDS. gphawk89's comments are the best so far, but a payday loan can be an open option for those that know ahead of time that they are going to have to bounce a check...JUST USE CAUTION. Now, let's do a little comparison:

BANK: -pays its ever-decreasing # of employees utter crap while demanding A LOT of work from them (much like the Wal-Mart model) -makes "free" checking seem like a dream come true, when in reality the goal is to be able to turn a profit off of a select few that will bounce and later pay up (30 bucks on the bank side, and X$ on the retailer's side) -hopes that a "free" account will induce the user to apply for a LOAN, where the real $ will come pouring in -pretends that loans are a great thing and that you can't live w/out them - HELL, EVERYONE'S DOING IT -hires a really nasty collection agency to do the dirty work when it needs to be done -hides behind a facade of "institutionalism" when in fact they are the epitome of the capitalist, corporate, market-hording system

PAYDAY LOAN JOINT: -does its own dirty work -doesn't hide behind any glamour...in fact, pretty much understands that this is a person's last resort so they don't make any bones about it -also pays its employees total crap...but, at least where I worked, much wasn't expected of you (either approve or deny the person and give 'em the money...if they don't come back call them) -at least where I worked, there were no hidden fees or interest charges, or any sort of premiums...everything was posted right there on the wall for you to look at - cut and dry

Well, if I had to make a call here I'd say that they really are two peas in a pod. In fact, it won't be long before some genius in a bank board room decides to strike out on his/her own and open up a bank and payday loan place all rolled into one. You didn't hear that from me though.

cutny 8 years, 7 months ago

These scams that target the underclass ought to be outlawed. It's interesting that the article did not interview any of the owners of these businesses, as I'm sure at a certain point they would have to address how unconscionable it is to profit from those who most need the help. Seems about as sound of business practice for the customes as it is renting to own furniture or a television. It's a trap for the poor, not typically the demographic class priviliged lawmakers are looking to protect. Missouri's business practice are only slightly more loathsome than Kansas's. Hey Marion, what's a "Framer's market?"

conserv26 8 years, 7 months ago

I think that a lot of you guys on here that think these businesses are a scam are missing the point. Although these are not the most reputable or respectable businesses out there they do provide a service in times of need and if used responsibly they can really help out in a pinch. The problem is those lower intelligence type people who are using them to buy clothes, entertainment, etc. You should only use these services in the event that you have no other options and you need to have gas, food, etc. with payday a week or so away. We are living in times where a lot of people do not have savings and live paycheck to paycheck largely due to the outrageous cost of gas and inflation in prices of services/good with little or no pay raises. THE MIDDLE CLASS IS NOW REQUIRED TO DO MORE FOR LESS. These businesses should be used with extreme caution; if you are unable to pay off a loan in full when you get paid then you are in trouble because the interest will continue to accrue. Use caution, only take out small loans to get you by and you will be fine!!! And don't make a habit out of it but if it is needed a couple times a year, use the service. If you think about it, 15% interest is not that bad when many credit card companies are now charging 23-25% for APR. I would rather get a short term payday loan for a week and pay 15% then pay even more to a ruthless credit card company. If you think anything is criminal it is how credit card companies target college kids and young Americans leaving many young people forever indebted to them...

DaREEKKU 8 years, 7 months ago

Does anybody else find it funny that the loan shark is wearing a cross? Anybody?

Godot 8 years, 7 months ago

Is it 15% interest per year, or per month?

Unknown30 8 years, 7 months ago

conserv26 & JPT,

APR figured on a typical credit card is quite a bit different than the interest figured on a typical payday loan. First off, APR is a misnomer (another nifty little scam worked out in some board room somewhere a long time ago). The finance charge (interest + fees + etc.) is actually figured against your outstanding balance every MONTH (or once per "billing cycle", usually a month). Moreover, an "annual" percentage rate can and does usually change periodically (not annually - though it can change annually as well!). So, you see, "annual" is not really the correct term here - they use it because they divide the total interest charge on your balance by 12 (as you'll see below). If you have an outstanding balance of 1000.00 on an 18% "APR" credit card they will charge you 15.00 per billing cycle + any fees, service charges, etc., etc., that come along w/ the card as baggage (that's 1000 X .18 / 12 months per year = 15.00 + any fees = your monthly "minimum" balance). THIS IS THE TYPE OF NONSENSE YOU GET TO FILL YOUR BRAIN W/ WHEN YOU WORK AT A BANK AND PAYDAY LOAN JOINT.

Continued next...

Unknown30 8 years, 7 months ago

ON THE OTHER HAND...

The interest on a typical payday loan is figured thusly (varies widely from state to state...in those states where they aren't outlawed, that is): Let's say you borrow 100.00 against your next pay check, which should be about...say...900.00 (and you get paid every 2 weeks). Let's say the interest on the payday loan is 15%. That means that when your paycheck comes in, the payday loan joint expects you to come to them THAT VERY DAY (hence they are really busy on Fridays), and pay your 100.00 back + interest. In this case, you owe 115 big ones, because .15 X 100.00 = 15 + the 100 fronted you = 115.00. Simple enough. In essence, your paycheck said 900.00, but since you got 100 of it a week or two in advance and had to pay 115 back, you really just got paid 785.00 net. HERE'S THE KICKER: NOTE THAT THIS MEANS THAT YOU JUST PAID 15% FOR TWO WEEKS OF BORROWING - BECAUSE YOU GET PAID EVERY 2 WEEKS. On a monthly scale that means 30%. That is a juicy number, and, trust me, when banks see people getting away w/ this kind of stuff...and actually turning a profit...they get really jealous!!!!!!!...to infinity w/ those exclamation points!!! Then they run off to their buddies in the legislature (who sometimes also own and/or run banks) and start yelling really loud...but that's another thread. Now get this, some payday loan places will only loan up to 1 week before payday!!! Ha! That means...if you add it up... that you're paying the = of 60% (on a monthly scale/cycle). PRETTY DAMN STEEP.

Unknown30 8 years, 7 months ago

Continued from previous...

So you can see where the animosity comes from. It's not complicated like a credit card, but it certainly is expensive.
Banks are especially pissed because they spent all these years working out shifty deals through A LOT of fine print and A LOT of headache...and here comes some average Joe loaning money to the cast-offs and is making it work!!! However, a credit card really is the way to go IF YOU HAVE TO BORROW AND CAN'T GET A CONVENTIONAL LOAN OF SOME SORT.

In a nutshell, credit card "companies" (meaning, BANKS), charge people late fees and jack up rates because for the most part THEY CAN GET AWAY W/ IT. Folks, most people pay their debts, no matter what the cost. At the payday loan place I worked at our charge off rate was very low. I was blown away at how low. People either pay up or they get lost in the cycle until they can't (which usually takes a while - by then the "roll over" fees they've paid have long outrun the original debt). AND LET ME BE PERFECTLY CLEAR: GENERALLY SPEAKING, THE SO-CALLED LOWER CLASS PEOPLE OF THIS WORLD ARE WAY, WAY, WAY MORE HONEST THAN THE SO-CALLED UPPER CLASS FOLK. Just my personal experience from working both sides of the fence - and speaking very generally here. When you think about it, the rich folk don't get the way they are by being real nice to people - it's a very simple matter of fact. Oh sure, they cover it up and make it all look real nice (clean factory, low injury rates, etc.), but somewhere down the line someone is getting it. Got it?

OldEnuf2BYurDad 8 years, 7 months ago

I work for one of the nation's largest financial institutions. I think our "bank teller" above has painted the wrong picture. Banks are highly regulated. Payday loan joints are not. Banks have learned (the hard way) to avoid abusive practices. Payday loan joints ARE an abuse. Banks hesitate to let you get in over your head (generally speaking). Payday loans don't care one bit.

Payday loan stores should be outlawed. I'm shocked that they are allowed to exist. They prey on the ingorance of consumers like no other business on earth.

Conserve: You said "I would rather get a short term payday loan for a week and pay 15% then pay even more to a ruthless credit card company." Do the math. That comment makes no sense. 15% a WEEK is the very definition of ruthless!! No credit card charges 15% per week.

Godot 8 years, 7 months ago

If I were to dive into conspiracty theory land, or the theory of world-wide business practices, I would say that credit card companies jack up the interest rate on late payers because they can report the late pay to the credit bureaus, who then report this late payment to prospective lenders, who will, of course, not offer low interest to a late-payer. So they charge what the new lender would offer.

Brings to mind the phrase, "What have you done for me lately?"

jwmound 8 years, 7 months ago

People who own payday loan stores aren't out to get anyone, it s business like every other business in town. The reason people go to these places.. if you only get paid twice a month or so.. the week that your not getting your check... people need to buy food and daily essencials, you people think you could go to a bank and get a 100 dollar loan? They don't want to mess with that small of an amount because they wouldn't make enough money on it in the long haul. Loan stores fill the niche for people who don't have the greatest credit or jobs. Not everyone is so economically suited. If anything these businesses are helping the "lower" class society.

local_support 8 years, 7 months ago

Many of you should go read "The Working Poor" by David Shipler and then get back to me on budgeting.

conserv26 8 years, 7 months ago

JPT, credit card companies DO NOT CARE ABOUT YOUR CREDIT OR YOU. They are in it solely for the money and anytime they can charge you a late fee, increase your interest rate, etc. they will do so. I have seen this first hand as a young college student a few years back who didn't really understand the whole credit card thing...let's say I learned the hard way. My best advice is to avoid credit cards like the plague! If you have credit card debt you should get a consolidation loan from your bank or a credit union. You will pay off the credit card and have a loan with a much lower interest rate. You will then have a set monthly payment that will not change until the loan is paid off. Some people, most people, keep a credit card for "emergencies" which is actually a good idea as long as that's ALL you use it for. Payday loan places are making a killing on interest, however, if you only get loans of $100 or less, and pay them off as soon as you get paid, you really can't lose all that much. Credit card debt can just accumulate and is much more likely to get out of control.

Unknown30 8 years, 7 months ago

conserv26, You are now hitting on the idea of "revolving credit," which is something that credit cards for the most part partake of while payday loans do not - mainly because they're not allowed to. I'm not sure about KS, but where I worked the state didn't allow them to even be referred to as "loans". They were instead called "advances," and the "interest" was rather called a "fee". A credit card in this sense is more like a negative-bank. That is, the account "holds" onto your debt rather than your cash, and each month levies a charge against whatever negative balance you have. Not so w/ a payday loan. They front you the cash rather than credit, and charge you a one-time "fee" up-front. In most cases, though, a loop-hole allows the patron to "roll-over" the fee, BUT NOT TAKE ANOTHER ADVANCE UNTIL THE ORIGINAL IS PAID OFF. Just another way of approaching the beast. Again, this is all about options that the banks don't/can't offer.

Unknown30 8 years, 7 months ago

JPT,

They're making money, how much more "sense" can it make? Despite what OldEnuf2BYurDad said, banks are a lot less regulated than they have been historically, although they are very much under the federal thumb. On the one hand they love the corporate model (less pay-out, more intake - at the expense of both the customer and employee), but on the other hand they are dealing the stuff that makes the world go round so they have to answer to the Big Man. It's a wretched spot to be in. There is zero money to be had in holding (banking) someone else's cash. There is money to be made by investing someone else's cash.

OldEnuf2BYurDad, Why, pray, is there a bank on ALMOST EVERY COMMERCIAL CORNER while there are only a few payday loan places spotted about here and there? Is this because they are an "abuse"? Or is it because they "don't care"? As you can see, it's not so easy to fit them into the good/bad paradigm. I agree w/ you that they charge an insane amount for the "service". Credit card rates are also criminal. They are BOTH pirana's feeding on the refuse of those w/ liquid cash.

badger 8 years, 7 months ago

I've used payday loans occasionally, but never for a routine expense. Not to pay the power bill or buy gas or anything I should have budgeted for, but when I was living paycheck to paycheck and had sudden expenses. For example, getting a tire slashed and having to replace it so I could keep driving to work. The payday loan gave me two weeks to rebudget, work some overtime, skimp on food and other variable expenses, and put together the money.

I don't think of the fifteen bucks as X percent of interest, because what it is to me is fifteen bucks. That's all. I would pay (by my view of it) a fifteen dollar convenience fee to get an advance on my paycheck for some hours I hadn't worked yet. When I had a boss who would give me that advance, I'd go that route, but lacking that option and lacking a bank to lend me the money, payday loans were a godsend for me on a few occasions when things were tight and the budget got shot.

lunacydetector 8 years, 7 months ago

if you pay your water bill or pay for the property taxes on your car and use your debit/credit card, they used to charge a 3% convenience fee. where was the public outcry about that? if someone used their credit card, they are paying an exhorbitant amount of interest plus the user fee. let's say there is a $500.00 property tax bill on your car, at 3% you pay an extra $15.46 plus the interest from your credit card. talk about a screw job, and it's coming from the state or the county.

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