September 1, 2011

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Do Payday Lenders Offer a Way Out or Just Enough Rope to Hang Yourself?

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Kris Rudarmel

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Do Payday Lenders Offer a Way Out or Just Enough Rope to Hang Yourself?

Gaylen Webb

September 1, 2011

Bailey is a prime example of the desperate measures Hilton describes. At one point Bailey had seven payday loans tied to one paystub. “Was I desperate?” she asks. “Absolutely! In fact for the second time in my life, I felt ending my life would be far better than what I was living.”

Paula Carr, Ogden City Justice Court administrator, says payday loan customers are “endemic of the demographic—any time you have a military base or colleges, you have a lot of payday loans. In Ogden we have a lot more people that are living at or below the poverty line than other cities.” Consequently, Carr says her justice court has a high percentage of payday lenders filing small claims cases. “I would imagine the other justice courts are similar,” she adds.

Earlier this year, the Coalition of Religious Communities produced a report showing that in Utah County, 62.5 percent of the small claims cases seen were brought to court by payday lenders. But Gibson argues that the actual number of small claims filings is small compared to all of the payday loan transactions that do not end up in court.

“Small claims court is a last resort [for any lender]. At CheckCity, we try every means possible to work with the borrower before we go that route,” she says. Further, she asserts that payday lenders don’t want to lend to borrowers that can’t repay.

Perhaps that is true for CheckCity, but not for the industry as a whole. Bailey’s experience seems to prove otherwise.

Bailey filed for bankruptcy in 2004. Her $41,000 of debt included seven payday loans. In 2005, with limited income, she turned around and borrowed another $3,271 via 16 payday loans from nine different lenders. “As an alcoholic or a drug addict does not know where the money will come from for their next fix, an addict of payday borrowing wonders where the next lender is that you can borrow from in order to pay the other [lender] you used that money to pay yet another [lender],” says Bailey.

Cycle of Debt

Critics of the payday industry say that most payday customers—like Bailey—are repeat or “trapped” borrowers locked into revolving high-priced, short-term credit rather than more reasonably priced long-term credit. Preston Cochrane, president and CEO of the AAA Fair Credit Foundation, a nonprofit credit counseling agency, says nearly a third of the people his agency assists are tied up in payday loans. “And if they have a payday loan, they typically have three or four loans, not just one.”

Moreover, Cochrane says in his experience, the payday lending business model is set up to encourage borrowers to return “again and again to renew the loan. Once someone gets into the cycle, it’s hard to get them out.”

Some states subscribe to a database that tracks payday loan activity to prevent borrowers from taking out multiple payday loans within a certain time period. Frank Pignanelli, a lawyer and lobbyist for the Utah Consumer Lending Association, says that would be prohibitively expensive.

Gibson adds that at CheckCity, she can see how many lenders a borrower has visited in a certain time period and other factors that identify a borrower’s stability and ability to repay a loan. She claims that many payday lenders use a third-party reporting agency to monitor customer borrowing habits in order to weed out those with a troubled borrowing history.

Short-term credit is often the last, best option for CheckCity clients, whose only alternative would be to bounce a check. “[Our customers] are very thankful that we are able to save them money by offering an effective, cheaper option to their short-term credit needs in lieu of bouncing checks,” says Gibson.

“There is a reason this industry is well-liked and used: It’s cheaper and more convenient than the alternatives [fees and penalties],” says Pignanelli. “You can’t even get a $300 loan for a week from a bank or credit union.”

But that short-term loan could prove expensive in the long run. A study from the Center for Responsible Lending found that the typical payday borrower pays back $793 for a $325 loan. And according to research from the FDIC’s Center for Financial Research, high-frequency borrowers account for a disproportionate share of a payday lender’s loans and profits.

Unreasonable Rates?

While other states have put caps on the usury rates (according to Jaramillo, the cap is 36 percent in New York), Gibson says it would be impossible for a payday lender to operate in Utah with a cap of 36 percent because the business model is built around processing microloans for short periods of time, usually a week to two weeks. Such a low interest rate would not generate enough revenue to cover overhead expenses, wages, benefits to employees or income taxes, she says.

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