Lenders cash in
January 11, 2006 - Denver, Colorado
Colorado's payday lenders are charging borrowers an average annual interest rate of 391 percent on short-term loans that are typically paid off in 17 days, a new study reports.
The latest data compiled by the administrator of the Colorado Uniform Consumer Credit Code portray a $400 million-plus annual statewide lending business that is booming at the expense - and convenience - of the financially challenged.
"I can survive without it," said 25-year-old Sebastian Straub, who agreed to pay $40 for a quick $200 loan Tuesday from Paycheck Loans on Stout Street. "But not without living on ramen noodles for the next week and a half."
Straub said he takes home about $1,660 a month as an admittance clerk at Denver Health Medical Center. The monthly rent for his one-bedroom Capitol Hill apartment in Denver takes about half of that.
About three times a year, what's left over isn't enough to cover his phone bill or other utility costs.
"I try not to think about it," said Straub about his paycheck-to-paycheck budgeting. "But these places can be helpful when you don't have the cash.
"I've considered getting a credit card, but I'm leery. I don't trust myself. I could end up taking out a (payday) loan just to pay credit card bills."
"It's sub-prime lending, and it's a growth industry," said Paul Chessin, an assistant Colorado attorney general who prosecutes payday lending cases.
Chessin, who writes about the study in the latest issue of the Denver University Law Review, raises questions about the way payday loans, which provide cash in a hurry with no credit checks, target the "working poor."
But Paycheck Loans owner Bill Carter says his three-store Denver chain provides a valuable service that keeps borrowers from getting socked with bank overdraft charges. A $35 penalty for overdrawing $15 on your bank account is what's really unconscionable, he said.
"Our customers are cost-conscious. They count every penny," Carter said. "Why do they come here? Because it's cheaper than bouncing checks. It's as simple as that."
The loans require customers to write a check, postdated to their payday, that includes the loan amount plus interest. Most payday lenders in Colorado charge the maximum finance fee, which for a $100 two-week loan is $20. That cash advance equates to a 521.43 percent annual interest rate.
Chessin's article says the high finance charges run counter to the industry's claims that payday loan fees are "set by competitive forces in the market."
Although the triple-digit interest rates presumably reflect huge risks with payday borrowers, payday lenders report that only 3.34 percent of their total loan volume goes bad.
Chessin said the charge-off rate compares favorably with commercial banks' 2.69 percent loss rates on all consumer loans.
For credit cards, it was 5.15 percent.
Among Chessin's most troubling observations is the "debt treadmill," or cycle of debt, on which payday borrowers often find themselves. Unable to pay off the loan in full on its due date, borrowers end up renewing the loan numerous times over several months.
In some cases, borrowers can end up paying finance charges that are three times their initial loan amount, he writes.
In 1999, major changes in the state's payday lending rules that let lenders charge more for loans of $300 resulted in a big negative for consumers, Chessin said.
Although the maximum payday loan was set at $500, lenders were permitted to charge as much as 20 percent - or $60 - on the first $300 borrowed, with 7.5 percent on the principal amount exceeding that.
The payday lending data now show that close to three-quarters of all payday loans are written for amounts of $300 or less. The unintended consequence, Chessin said, is that lenders have an incentive to "split" a large loan into two smaller loans, allowing them to charge higher interest.
A footnote to Chessin's article notes "any opinions are those of Mr. Chessin alone and do not represent the official policy" of the Colorado attorney general.
With tentative legislation in the works to rein in potential payday lending excesses, payday lenders aren't buying Chessin's opinions as independent, let alone objective.
"He's an attorney, not a statistician," said Lowell Chatburn, a Paycheck Loans associate.
Chessin said that he deals with payday lending issues every day and that even in these days of heightened consumer protection, payday lending laws need more scrutiny.
"The report ought to speak for itself," he said. "If it doesn't, I haven't done my job."
The typical payday borrower
Who: According to data collected from state audits covering 22,000 loan transactons from 2001 to 2004, the typical Colorado borrower is a 36-year-old single woman making $2,370 a month.
Her loans: Nine a year, typically in amounts of $300 or less, from the same payday shop
Her finance charges: $477.16
Rocky Mountain News, John Accola, Staff Reporter
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