MIDDLE-CLASS people rarely hear about payday lending. Until recently, these loans were principally a danger to the working poor.
Now, payday lenders are setting up shop in the suburbs and on college campuses. Rightly used, they fill a niche that banking institutions don't. But they also promote a treadmill of debt that's a one-way walk to bankruptcy.
Payday loans are for people with jobs and checking accounts who suddenly need fast cash. Typically, lenders provide $200 to $500 at any one time. The loans are granted for periods as short as one or two weeks, at fees of $15 to as much as $30 a pop. That translates into super high interest rates.
Assume that you need $100 to tide yourself over until your next paycheck. At a payday lender, you can write a check for, say, $115, on your empty bank account. The lender holds the check and gives you $100 in cash.
Two weeks later, when you get paid, you can tell the lender to cash the check. Or, you can redeem the check giving the lender $115 in cash. You've paid 391 percent interest, at an annualized rate. With a $30 fee, you've paid 782 percent.
If you can't afford to cover the check, the lender -- ever helpful -- will roll over the loan for another week or two, at another $15 to $30 fee. Interest rates have been documented that exceed 2,000 percent, according to the Consumer Federation of America. If you can't pay, you're often threatened with prosecution for passing a bad check.
Why would people take payday loans? "For emergency cash," says Abby Hans, chairman of the National Check Cashers Association in Hackensack, N.J. An example might be a person with no savings and maxed out on credit cards, who suddenly needs a $500 car repair or has to pay a doctor upfront.
A payday loan can help someone out of a tight spot, provided that he or she borrows only once. But the lenders work hard at turning new borrowers into repeat customers, paying fees again and again.
ACE America's Cash Express, which has 900 outlets in 30 states and the District of Columbia, even offers a gold "frequent user" card, and passes out prizes to people who borrow a lot.
A recent report on the industry by Stephens Inc., an investment firm in Little Rock, Ark., found that the average customer earns $25,000 to $40,000 and borrows five to seven times a year. The lenders can earn a fat 48 percent return on their investment.
Jeff Evanson, an analyst for the brokerage firm Piper Jaffray in Minneapolis, says one payday lender does 11 transactions a year with its established customers. Such a borrower could pay anywhere from $165 to $330 for a rolling $100 loan.
Hans says it's better to take a payday loan than bounce a check, and the loan can cost a little less. But why assume that someone who's broke would deliberately pay a bill with a bad check? Maybe he or she finds a way to get through the next two weeks. That's what people did before payday loans came into their lives.
Payday loans are typically made by check-cashing companies, pawnbrokers and some 2,000 stand-alone payday lenders, with names like Check N Go, Cash 'Til Payday and Cash-N-Dash.
Their growth has been spurred by a dearth of mainstream financial institutions in poorer neighborhoods, rising bank fees, mistrust of banks and bankers' disinterest in small accounts. You can't borrow $500 at a bank, except through a credit card.
Charging exorbitant fees for small loans is what usury laws were supposed to stop -- "protecting the needy from the greedy," Jean Ann Fox of the Consumer Federation of America told my associate, Dori Perrucci.
But lobbyists for the lenders are swarming over the statehouses, getting new laws passed to legalize their high fees. They've succeeded in 19 states and Washington, D.C. Says Fox, "In this case, the greedy have the financial wherewithal to effectively lobby state legislatures."
There are some alternatives to payday loans: loans from friends, installment payments, payment plans from utility companies, credit counseling. Anything, to avoid getting trapped with serial fees.