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Lure of fast cash leads to triple-digit interest loans Posted: Saturday, Jan 26, 2008 - 11:22:59 am PST By DAVID GUNTER Correspondent
Payday loan stores say legislation would hurt 'little people' (This is the second of two articles being published this week on the issue of payday loans in the Sandpoint area.)SANDPOINT -- The number of local payday loan outlets has grown 200 percent in the past five years, from three in 2003 to nine stores as of this month. That's a substantial growth rate, but it pales in comparison to the annual percentage rate (APR) those stores charge for loans. At the going fee of $20 per $100 borrowed, the average payday loan can cost the borrower as much as 520 percent APR.
Beyond that, there are no restrictions on fees that can be attached to a payday loan and no limitations on how much interest can be charged. The lack of such regulation leaves Idaho in a decided minority at the national level, where only eight states have not passed legislation that completely prohibits payday loans or places tighter caps on APR, additional fees and how frequently loans may be made to the same borrower. This month, Sen. Shawn Keough, R-Sandpoint, and Rep. George Eskridge, R-Sandpoint, are working on draft legislation to further regulate the industry. Payday lenders say that any added regulation -- such as lowering APR or requiring a "cooling-off" period before another loan could be made -- could hurt their business. "It would highly impact us, because a lot of people depend on us between pay periods," said Melissa Abeyta, branch manager at the Quik Cash store in Ponderay. "It would hurt the little people." See LOANS, Page 3 Payday loans fill banking gap The growth in the payday loan industry took root in the 1980s, when deregulation and the elimination of interest rate caps spurred large banks to move out of low-income areas and the inner city in search of larger, more profitable loans. In their wake, payday loan stores found a readymade clientele. By the 1990s, more than 10,000 such lenders had opened shop. The Center for Responsible Lending (CRL) now estimates there are more than 25,000 payday loan stores in the U.S. -- nearly twice the number of McDonald's franchises nationwide. According to CRL, payday lenders have created a $28 billion industry, with about $5 billion coming from additional loan fees paid by customers. A Web search of the Idaho Department of Finance licensee database lists the names of 227 payday loan businesses across the state, many of them franchised by out-of-state owners. Based on a 2005 CRL report, customers in Idaho were charged more than $26 million in additional loan fees during that year, but the number of payday lenders in the state has grown considerably since that time. Location is Everything As mentioned, payday lenders in metropolitan areas tend to cluster in inner cities, often using professional real estate location firms to determine where they can find the highest concentration of the lowest-income residents. In the Sandpoint area, the location strategy is similar, though more subtle. Lacking a distinct, low-income neighborhood to target, lenders instead must place themselves where traffic in that kind of customer is likely to be the highest. In Ponderay, one can literally see four payday loan stores from the Wal-Mart parking lot. The fifth is located a two-minute drive away, next to a thrift store. The thrift shop connection is the location vehicle of choice for payday lenders in Sandpoint, where four of them can be found ringing the Goodwill Industries store. "Two-thirds of the borrowers who use payday loans are office workers, blue-collar employees or people on some form of government support," said Jean Ann Fox, director of financial services and a consumer protection advocate for the Consumer Federation of America. "A family earning $25,000 with no savings is eight times more likely to take out payday loans." High Risk, High Gain Proponents of the payday loan industry argue that these customers would never be considered for loans by most banks or credit unions because they don't have collateral or a strong credit history. "That's why the interest rates are so high," Quik Cash's Abeyta said. "You're risking not getting your money back." These same customers may also come to view the payday loan store as a surrogate for the banking relationship they would like to have under different circumstances. "I think people start out using it when they're in a pinch and when they realize it's not so bad, they use it as an alternative to traditional banking," Abeyta said. At the Money Depot in Ponderay, co-owner Peter Gillis calls his business "a convenience store for money," but also agreed that some customers use his service in much the same way as other people might use a bank. "While the legislators have the right spirit in mind, these are people that don't fit the banking model and are looking for other options," he said. "These are folks who are having a tough time. Otherwise, they wouldn't be in our store." Breaking the Cycle While both Gillis and Abeyta said they do not encourage customers to use payday loans as a long-term solution -- and both offer at least some discount for early payoff -- the Consumer Federation of America counters with data showing that 90 percent of payday loan revenues nationwide come from what it calls "trapped borrowers" who are forced to use the lender's offer of rolling over a loan and paying additional fees. The term "trapped borrower" may not be an overstatement. At 300 percent APR -- far lower than the more than 500 percent annual interest payday lenders are allowed to charge under Idaho's current regulation -- the interest on a loan can exceed the principal in only four months. According to Fox, these loans add up to a house of cards that looks like a dangerous replay of the sub-prime mortgage fiasco that has hobbled the U.S. housing industry and rocked world financial markets in turn. "Payday loans involve getting cash-strapped people locked into a situation of long-term, triple-digit interest rate debt," she said. "These people have no proven means of repaying those loans and we've seen what a wonderful outcome that has had in the mortgage industry." If legislation passes that imposes rate caps or restricts loan terms, lenders warn, they will be forced to move their business to states that don't have such regulation. If that happens, they say, the little guy will get caught in the crossfire. "The whole dynamic is that states with cooling-off periods and rate caps force payday loan businesses to close," Gillis said. "Then, these customers end up pawning things at pawn shops or putting up their vehicle for a title loan. People will always find ways to get quick money." Local advocates for low-income families, meanwhile, say the lure of quick money in the form of payday loans targets the very people they are trying to help work their way out of poverty and catches them up in a cycle of debt that becomes nearly impossible to break. Brenda Hammond, who works as a coach for the Circles Initiative program that is offered through the Community Action Partnership office in Sandpoint, tells the story of a single mother of four who recently celebrated her freedom after paying back two such loans. Within weeks, she had car trouble and an expected check was delayed. Her first stop was the payday loan store. "Now she's right back in debt, up to two loans again," Hammond said. "She's locked into a situation where those loan payments come out of her check before anything else and she's fallen two months behind on rent." "The bottom line is this," said consumer advocate Fox. "This kind of loan takes advantage of the low-income population. How can you say you're helping people when you trap them in repeat borrowing at 520 percent interest?" • Submit your payday loan experiences, comments, etc. on the Daily Bee's weblog at www.bonnercountydailybee.com. wake up people! wrote on Feb 27, 2008 2:50 PM: " I usually stear clear of payday loan articles due to the high volume of uneducated babble that usually follows. I have been working @ a payday loan office for 10 yrs and have seen many differant types of people come and go. People that have no money, people that have plenty of money but just don't want to wait, and people who have money but just don't know how to budget. Regardless of what type of people are using a payday loan business they are all over the age of 18! This would mean that they are old enough to make their own decisions. This article state where some of these lending facilities are...next to wal-mart, thrift stores, etc. Well an fyi to all of the advocates in this article doesn't a trift stores get thier items free off the streets or dropped of free by a person giving the items away. Then they take those same free items and mark them up about five times and sell them to the very same poor people you say lenders prey upon. Wal-Mart boy theres a clean cut business. Haven't they been sued for several imoral things such as near slavery. But I bet you shop there and even encourage the people you coach to apply at their swet shop. So I have a great idea why don't you take what time you have and invest it into something more productive like stronger sentences for child molesters or reducing crime in your area! " Honestly now wrote on Jan 31, 2008 3:23 PM: " I've used payday loans and they've helped a lot. But I've never kept them open for over a year, so I am unclear on how these loans carry a 400% APR.I can see them being trouble if you go over a year, but they're designed for people who can pay them back on their next paycheck, as promised. Payday loans are available to anyone with a paycheck. Some people shouldn't take them on, but do. It seems to spoil things for the rest of us. " Fast Eddie wrote on Jan 30, 2008 8:32 PM: " There used to be prohibitions to this type of abuse. I'm talking of Loan Sharking. But apparently because these laws have been diluted or worse, overwitten, hense there is no teeth to combat this type of activity. Greed is at the basic root of it all!!! Second, we should not allow it, instead stand up and voice ourselves. I hope that Casinos don't get a foot hold in Sandpoint else we'll be in for a lot of problems...Again Greed!!!! In response to user32, ever think of an extra job? I did it long ago when the need arose and I never had second thoughts. You can't use this as a Crutch cause it's easy. As far as Bonner County Taxpayer,. This is not a Republican conspiracy or Corporatcracy (gee lets make up other many syllable words and feel better)it's about each and every one of us being responsible to Ourselves and finding enough in Ourselves to solve our own personal problems Ourselves! Blaming another entity for your own situation is just putting blame in the wrong place. It should not be the governments responsiblity to fix debt or any problem that is self created. Try reading the Constitution and get a grip on whom is responsible for whom. " Bonner County Taxpayer wrote on Jan 29, 2008 8:32 AM: " Gary, who do you think you are kidding? Predatory lenders are exactly the people the Republicans had in mind when they deregulated banking and refused to increase the minimum wage. To conservatives, desperate people are a commodity to be exploited. The unsupportable federal deficit, the housing meltdown, the huge spike in working people losing their homes and the skyrocketing rate of personal bankrupcies are the result of policies that are working exactly as intended. Wake up people. A few more years of Republican rule and we will all be indentured servants to the Corporatocracy. " Then again .... wrote on Jan 29, 2008 7:53 AM: " Consumer advocacy stats say that states that have prohibited payday loans or put lids on interest rates have saved residents of their states $1.5 billion in fees.
Even a late fee on a credit card is only a tiny fraction of the annual rates payday loans will cost a borrower. Who would have thought there would be a form of lending that made credit cards look affordable?! " To Gary wrote on Jan 29, 2008 7:51 AM: " Which reforms are you referring to?
Can you list them and provide details on how and who they have helped? " Gary wrote on Jan 28, 2008 2:24 PM: " As a representative of the payday lending industry, I believe it is critical for people to understand that prohibiting payday lending would only force consumers to use the other, more costly short-term credit products available, such as overdraft protection, late fees on credit cards and other bill payments and off-shore Internet lending.
In Georgia and North Carolina, where payday lending was also banned, that the Federal Reserve Bank in New York found that bounced checks, personal bankruptcies and complaints about debt collectors jumped significantly when consumers no longer had the payday loan option. In addition, no one is offering any viable payday alternatives. To date, almost all of the attempts to create payday loan alternatives have either been charity-based, required government subsidies, unavailable to the general public, unprofitable or unsustainable. I hope people will look carefully at the serious reforms instituted by payday lenders to protect our customers. " user32 wrote on Jan 26, 2008 6:36 PM: " I am just curious, has anyone talked to the customers of these pay day loan places? Has anyone thought that just maybe, Idaho jobs do not pay enough to live on? Yes they are easy to get caught up in, but what other choice do these families who use these service have? Next time they need to put food on the table for their kids are you going to give them a loan? How about gas money? Are you going to fix their car for them? " POST YOUR OPINION
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Bonner County Daily Bee
P.O. Box 159 / Sandpoint, Idaho 83864 / 208-263-9534
Bonner County Daily Bee Online is updated at 10am PST.
mercy wrote on Feb 23, 2009 1:58 AM:
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