|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
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.
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.
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.
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.
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."