Fast cash loans an expensive trap
By MIKE CHALMERS, The News Journal
Posted Monday, October 15, 2007
Seven years ago, Robert Lee passed by a plaza storefront, saw a sign advertising quick and easy payday loans and went inside.
Lee, who earns about $36,000 a year as a supervisor for a home health care company, needed a little cash to carry him over until payday, so he took out a two-week loan. It cost him $20 for every $100 he borrowed, and he soon found himself going back for another loan every few weeks when money was tight. Sometimes he paid off the loan on time, but other times he'd carry it over for another two weeks, then two more weeks after that.
The short terms and small amounts masked a larger cost: Lee was paying the equivalent of 520 percent annual interest, adding up to $10,000 to $11,000 in the past seven years.
"Some years it was more than others," said Lee, of Newark. "I'm just giving my money away. I've got to find a better way to do this."
Critics of payday lending agree and are trying to help. A growing number of nonprofit agencies, credit unions and even large banks have begun providing Lee and the millions of other Americans who use payday lenders an alternative by offering their own loans at much lower interest rates.
The first such program in Delaware begins today, when West End Neighborhood House launches its Worker's Loan Program. The Wilmington-based organization has enlisted banks and other nonprofit agencies to offer short-term loans at 12 percent to 15 percent.
Later this month, American Spirit Federal Credit Union in Newark will begin providing 30-day loans at 18 percent.
And sometime next year, the Delaware Community Reinvestment Action Council expects to partner with a credit union to start a similar program for Wilmington residents, Executive Director Rashmi Rangan said.
"We need to beat them at their own game," said Paul Calistro Jr., executive director of West End Neighborhood House. "People need to get angry about this and see that it's exploiting people."
Steven Schlein, spokesman for the industry group Community Financial Services Association of America, flatly dismisses the ambitions of West End and others.
"They're not going to succeed," said Schlein, whose group represents 150 payday lending companies, or about 60 percent of the market.
Other nonprofit agencies around the country have tried to offer payday loans at the equivalent of 250 percent annual interest and failed, he said. The largest commercial lenders see relatively thin profit margins of 8 percent to 12 percent on their loans, he said.
"I'm betting they [West End] can't do it for any less than $10 per hundred-dollar loan," Schlein said.
Calistro, in turn, dismisses Schlein's criticism.
"He's full of crap," he said. "If they're all on such small margins, why are they one of the fastest-growing industries in the country?"
Before 1990, there were virtually no payday lenders in the United States, experts said. By 2000, about 10,000 outlets had sprung up, and today there are about 24,000 outlets, Schlein said. His group welcomes competitors, he said.
"Competition will drive the market for everybody, and it will prove how valuable the service is," he said.
Some Delaware companies have gotten out of the business in recent years. In 2005 and 2006, Rehoboth Beach-based County Bank and Brandywine Hundred-based First Bank of Delaware stopped their payday lending programs after criticism from the Federal Deposit Insurance Corp. and advocacy groups.
The growth of lower-cost competition, as well as new laws capping interest rates in Oregon, Washington, D.C., and other places, is evidence that the public has begun to understand the pitfalls of payday lending, said Sharon Reuss, spokeswoman for the Center for Responsible Lending, a North Carolina-based nonprofit group opposed to predatory lending.
"Their business model has been outed for what it is: debilitating debt," Reuss said. "There definitely seems to be a reaction about triple-digit interest rates and the debt trap."
Borrowers in a bind
Roxanne Kenney learned her lesson about payday loans four years ago.
She was making $800 to $1,000 a month working at a fast-food restaurant, including as much overtime as she could get. She managed to pay her $675 rent, plus other expenses for herself and her two children, while working toward her GED at James H. Groves High School.
That is, until the restaurant cut her overtime one month and she came up short. She saw a sign advertising payday loans and borrowed $100 for two weeks.
"I got the loan with the intention of paying it off and that would be that," Kenney said. "But every time I went to pay it back, I needed that $100.
" So Kenney renewed the loan, each time paying $20 in interest and a $10 late fee. After four months, she'd paid $240 but still owed the original $100. "I felt like I was never going to get out of it," she said. "I finally just gave them the money and suffered for a month. We ate, but it wasn't the normal grocery list."
Kenney got her GED earlier this year and now works at West End Neighborhood House as an instructional assistant, helping teenagers and young adults earn their diplomas.
Plenty of people like Kenney seek financial help at the F.A.I.T.H. Center, a cooperative effort of several Wilmington churches, which is working with West End on the loan program, said Executive Director Cheryl Morris Cooper. A third of them list payday loan payments as one of their major monthly bills, she said.
"A person runs into a financial bind and they're looking for some help," Cooper said. "What they don't realize is that the place they go for help, that payday lender, buries them."
Rangan said payday loans boom around Thanksgiving and Christmas, when needs and desires peak. But the loans are popular year-round among people facing a big car repair bill, a medical emergency or simply a lack of money until the next paycheck arrives.
"Incomes haven't grown, but the costs of everything have gone up," Rangan said.
'You're buying time'
Calistro said the strategy of West End and other nonprofit agencies has been to educate consumers about the high cost and pitfalls of payday loans.
"But at the end of the day, all we did was make them feel worse when they went to get their payday loan because they still needed the money," he said.
Last week, Paula Sullivan, of Wilmington, came to West End to learn about their Worker's Loan Program because she's tired of paying the high costs of commercial lenders. "I've had plenty of payday loans, and I keep saying I won't get another one," said Sullivan, who said she once had six loans at the same time. "I've rolled them over and over. They're easy to get."
Fast cash loans an expensive trap By MIKE CHALMERAS, The News Journal Posted Monday, Octuber 15, 2007
Barbara Reed, West End's director of housing and financial management, wanted to understand payday lending firsthand, so she went to a payday lender in Newark and took out a $350 loan. After 10 days, she would need to pay back the $350, plus $59.
That meant the loan's annual percentage rate was 615 percent. Over the course of a year, the interest would add up to $2,154.
If she couldn't pay back the loan, she could just pay $59 and extend the deadline by another 10 days, at which time she'd owe another $59, the lender told her. If Reed still couldn't pay it all back, the lender told her she could get another loan for $500. That would not only pull her further into debt, Reed said, but it allowed the lender to get around the Delaware law that prohibits rolling over the same loan more than four times.
"They're pumping me up the whole time," she said, "telling me 'Honey, you're buying something valuable, you're buying time.' "
Becoming mainstream
The payday lending market also has begun attracting the attention of mainstream banks and about 1,000 credit unions, said Matt Fellowes, a senior researcher with the Brookings Institution, a Washington, D.C.,-based think tank.
Earlier this year, the Federal Deposit Insurance Corp. launched a two-year pilot program to develop "affordable and responsible small-dollar loan programs." Later this fall, the FDIC expects to release the names of the banks that have applied to participate, but Fellowes said he's heard about 50 banks have done so.
Pennsylvania's credit unions developed their own payday lending program a year ago, said Diane Powell, director of communications for the Pennsylvania Credit Union Association. Since then, 57 of the state's 550 credit unions have begun offering small, short-term loans to compete with commercial payday lenders, Powell said. By the end of June, the credit unions had made nearly 1,700 loans and saved borrowers more than $619,000 compared to what they would have spent at commercial lenders, she said.
Loans are capped at $500 and carry an 18 percent interest rate and a 90-day repayment deadline. Ten percent of the loan goes into a savings account for the borrower.
"Both efforts suggest there's broad recognition of the opportunity to compete with payday lenders because their business model is just so expensive," Fellowes said. "Once banks and credit unions get their foot into the market, they'll be able to outprice the payday lenders over time," Fellowes said.
Jane Bailey, executive vice president of the Delaware Credit Union League, said the group is considering a program like Pennsylvania's. There are 34 credit unions in Delaware with 225,000 members.
Maurice Dawkins, president of American Spirit Credit Union in Newark, said he's been watching the popularity of payday lenders grow among the group's 9,000 members over the past few years.
"We were bombarded with calls from payday lenders, asking if there was sufficient funds in members' accounts," he said. "That was a red flag for us."
American Spirit members, who must live in, work in or have some other connection to Newark, will not be able to roll over their 30-day loans or get another loan without paying the first one, he said.
"Our goal is to steer them into some financial education," Dawkins said.
source: delawareonline.com |
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