Payday loan is quite nice, if you're the lender

High interest rates fuel vicious cycle

Life on a Shoestring

Your Money

January 11, 2004|By Kathy M. Kristof

CHRISTMAS 2001 haunted Anita Monti for nearly two years.

The 60-year-old North Carolina resident was behind on her electric bill and short of cash to buy presents for her grandchildren that year, so she applied for a short-term "payday loan."

That mistake locked Monti into a cycle of twice-monthly borrowing that ultimately cost her $1,780 to pay off $700 in loans.

More than 90 percent of payday loans are made to repeat borrowers such as Monti.

"I hated to see Fridays come because I knew I'd have to go to the bank, pull out all of my money to pay them - the payday lender - and then get another loan to pay my bills," said Monti.

To get a payday loan, the borrower must show the lender a pay stub - to prove he or she has a job and thus will get some cash within two weeks - and then writes a postdated check to the lender. The check, which is for the amount of the loan plus a fee that usually amounts to 15 percent of the loan amount, serves as security.

If the borrower doesn't return to repay or renew the loan by the date on the check, the check is presented at the borrower's bank for payment. If the balance in the borrower's account can't cover the check, the borrower faces bounced-check fees from the bank and the payday lender.

Unfortunately, borrowers who are so strapped for cash that they can't make it to their next paycheck are unlikely to be able to pay off the loan within two weeks, especially after paying the loan fee. Consequently, most borrowers end up renewing the same loan multiple times.

The typical annual percentage rate for the payday loans ranges from 391 percent to 443 percent, according to a study released last month by the Center for Responsible Lending. Payday lenders get around state usury laws by characterizing the cost as a fee rather than an interest rate.

Once borrowers get in the cycle of paying fees, they can't pull together enough money to pay off the loan, said Rebekah O'Connell, credit counselor with Triangle Family Services in Raleigh, N.C. "The borrowers are trapped."

A spokesman for the Community Financial Services Association, which represents the payday-lending industry, bristles at the criticism. "These are not ignorant consumers," said Steven Schlein, spokesman for the Washington-based CFSA. The average payday borrower earns between $25,000 and $50,000 a year and has at least some college education, he said. "They are choosing this option over the other alternatives."

In the past, the only alternatives for people with an immediate need for cash would be visiting a pawn broker; getting a cash advance on a credit card; borrowing from relatives; or simply bouncing checks - all options that have risks and costs of their own.

"Is it a desirable outcome that people roll over their loans? No," Schlein said. "But is it a better option than pawning your wedding ring or using a check that's going to bounce to pay your heating bill?

"These 'consumer protection' groups think they're doing good, but they are not offering sensible alternatives."

Jean Ann Fox of the Consumer Federation of America maintains that the old alternatives are more sensible than payday loans.

"A pawn transaction is finite," she said. "If you pawn your electric guitar and you can't afford to buy it back, they sell it and it's over. A payday loan is a debt that keeps causing you problems. It solves your cash crisis for exactly two weeks."

Kathy M. Kristof is a personal finance columnist for the Los Angeles Times, a Tribune Publishing newspaper. Write to her in care of Your Money, Room 400, 435 N. Michigan Ave., Chicago, Ill. 60611 or e-mail

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