Payday loan traps

PERSONAL FINANCE

Internet opens way for lenders from other states to sidestep Maryland's laws

August 12, 2007|By EILEEN AMBROSE

Aziza Gary grew increasingly uncomfortable.

Here she was, a lending specialist for a credit union in Baltimore, advising a member to steer clear of payday loans. Gary knew these loans were a bad deal from her years in banking. She even briefly worked for a company offering payday loans and had seen consumers unable to escape the cycle of these high-cost, revolving loans.

But the more the credit union member gushed with gratitude for Gary's sage advice, the more Gary squirmed.

The truth was Gary had three outstanding payday loans. A big chunk of each paycheck went to finance these loans. She was behind on her rent and utilities. And the single parent barely was able to put food on the table for herself and her young daughter.

"In the back of my head I'm saying, `You're such a hypocrite. Take your own advice,'" says Gary, 31, who works for the Municipal Employees Credit Union.

Her story is a firsthand account of the intoxicating world of payday lending and the hard journey out of it.

Payday loans are small cash advances on a borrower's next paycheck. Their hefty fees translate into annual interest rates of several hundred percent, if not more.

Maryland essentially blocks payday lenders from setting up shop here by capping the interest rate that can be charged on loans. But the Internet opens the door to payday lenders from other states and countries that can easily sidestep any state's consumer protection laws.

"Internet lending makes it very, very easy because you do that in the privacy of your own home," says Jean Ann Fox, director of consumer protection for the Consumer Federation of America. "Once you start, you get onto a debt treadmill."

"People don't tend to complain because they think it's their own fault," Fox added.

There are no firm figures on how much people borrow through payday lenders, although estimates range from $28 billion a year to nearly $48 billion.

Gary's troubles began about two years ago with an e-mail from a payday lender offering fast cash. She was struggling to make ends meet on her $22,000 salary.

The payday lender's e-mail arrived just when Gary needed money for school supplies for her daughter, who was then 11. All Gary had to do was fill out the online application. No faxing, no credit check. She borrowed $200 and gave the online lender access to her bank account.

"In 24 hours, the money was in my account," she says. "I thought that was the best thing next to peach cobbler at that point."

On payday, she had the option of repaying the $200 along with a $60 fee, or just paying the fee and rolling the loan over until the next paycheck two weeks later. She rolled over the loan. And each time she rolled the loan over after that, she paid another $60.

"I knew the business," she says. "I knew what could happen."

But she figured she could handle it.

Within a month of her first loan, Gary took out two others from different payday lenders that had e-mailed her. One loan was for $300 and carried a $90 fee; the other was a $400 loan with a $125 fee.

She says she doesn't remember why she took out the second loan.

"Honestly, greed," she says. "Just because I didn't have money at that time and I wanted something. And it was easy."

She took the third loan out to help meet the rent.

Every payday, she rolled over the first two loans. The third she would pay off but turn around and take out again. After three months, the first two lenders began withdrawing principal payments on top of fees from her bank account.

At that point, payday lenders were taking $375 from each paycheck. And after insurance and car loan payments were automatically deducted from her account, Gary was left with less than $100.

Her finances deteriorated rapidly. "I'm trying to stay in good standing with the payday-loan company so they don't come to my job and ruin my whole career," Gary says. "But my bills aren't being paid."

She says she fell two months behind in rent. For four months she made only partial payments on her electric bill. When the refrigerator was empty, she and her daughter visited Gary's sister for meals or to borrow food.

She didn't tell her family or colleagues what she was going through, worried they would think less of her.

"I panicked," she says. "I cried. I prayed. It was a crazy situation for me."

Then came the call at work from the cash-strapped credit union member whom Gary talked out of payday loans.

"As soon as I hung up the phone, ... I said, `OK, this has to end.' That's when I actually pulled my contracts and read what I signed," she says. "It's right there for you to see -- when you want to look for it."

What she saw scared her. The fees on one loan worked out to an annual percentage rate of 524 percent. The rate on another loan exceeded 700 percent. Maryland caps annual interest at 33 percent.

Gary says, "I walked into my supervisor's office, closed the door, cried for about 15 minutes and said, `This is my problem.'"

Sherry Bender was Gary's supervisor at the time.

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