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A librarian from Orange, short on funds because her husband was temporarily out of work, had enough to make the family's two car payments, totaling $630.

But that would leave nothing for groceries. If she missed the car payments, their credit would be hurt.

The only credit card was "maxed out." Her family and friends weren't in a position to help.

So she took out a $200 "payday loan," which let her clear the week's financial hurdles. With her next paycheck, she repaid the loan plus a $35 fee.

"It was extremely convenient," she said, though she paid the equivalent of a 455 percent annual interest rate.

Critics of the burgeoning payday-loan industry say consumers are paying too high a price for convenience: not just triple-digit interest rates, but also an endless cycle of debt. Some state lawmakers agree, and the industry is now the target of two reform proposals.

Payday loans also known as payday advances are short-term loans of $50 to $300 made by check-cashing firms. A borrower immediately writes a personal check that repays the loan plus an extra amount that consumer advocates call an interest payment but the lenders call a fee. The lender agrees not to deposit the check until the borrower's next payday. The borrower walks out the door with a fistful of fast cash.

But consumers who take out payday loans are walking into a debt trap, says Shelley Curran, policy analyst at Consumers Union, the nonprofit publisher of Consumer Reports magazine. Many can't repay the loan in the typical two-week period and end up renewing it again and again, she says. When they do that, consumers pay the same fees without paying down the principal, Curran says. "It's still an absolutely incredible amount of money."

And it's legal. Payday loans burst onto the California scene in 1997. The industry estimates that more than 1 million loans are made each month in the state. Under California law, payday firms can charge up to $17.65 per every $100 borrowed, up to a maximum of $300.

While those fees are high, the main controversy surrounding the industry is the practice of renewing the loans.

Under state law, companies technically can't "roll over" a loan. That means a borrower can't just repay the interest and extend the loan past its due date. Borrowers must repay the entire loan amount first, payday-loan firms say. But there's nothing to stop them from immediately re-borrowing the money they just repaid, plus interest. And many do just that.

Back-to-back transactions can become a cycle of debt, but it is a cheaper cycle of debt than the costs of repeatedly bounced checks and late fees that accrue when there's no money to pay bills.

But the interest rates for these short-term fast cash loans can be sky-high. Expressed as an annual percentage rate, the interest can be around  900 percent for a one-week loan of $100; 450 percent for a two-week loan and 200 percent for a four-week loan.

The industry objects to calculating an annual rate for a transaction that has a maximum span of 30 days, even though, legally, they must. 

For a lot of consumers, these loans are not only cheaper than the alternative not paying bills but they fill a much-needed niche, the industry says.

Banks don't make these immediate, small loans. They can't afford to, nor do they provide the fast cash turnaround time most payday loan borrowers need. Turning to credit cards for cash isn't always an option if the credit card is at its limit. Plus, some borrowers hard as it might be for many consumers to believe don't have credit cards.

Many payday-loan borrowers, such as teachers, aerospace and health-care workers, are paid once a month and are likely to need cash to cover them until the next check arrives. Sometimes the loan goes for everyday items, such as groceries. Other times the loan is for an unexpected car repair, medical bill or some sort of emergency.

The criteria for getting a payday loan are simple: Consumers must have a job or regular income. And they must have an active checking account.

Consumers need to be aware they're paying a hefty fee for quick access to cash. But it's less than you would pay if I would have bounced a check or missed a rent payment.

Hanna is a repeat borrower because she is working temporary jobs until she can find another full-time position. She sees the payday loan as a temporary solution until her income level rises.

Hanna and her roommate take out payday loans almost every month to help hit certain financial deadlines, mainly rent and a car loan. She borrows through Payday Loan Corp., which requires her to pay off each loan in full before signing up for a new one.

While embarrassed about taking out the loan, she'd rather deal with a bruised ego than face an eviction notice.

"A payday loan was the only way we could save our apartment," she said. "It's a real lifesaver."


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