Payday loans have pitfalls
November 25, 2006 - Mason City, Iowa
Five days until payday can be a long time when the rent is due and you don't have enough money to pay it.
For some families, payday loan businesses come to the rescue. The check doesn't bounce and the landlord's late rent fee is avoided.
But the reality is that a solution like this usually doesn't have a happy ending, according to financial counselors. Often, the family digs itself deeper and deeper into debt with ever-spiraling payday loans and their accompanying high-interest rates.
"We're seeing people on a regular basis that are caught in the cycle," said Kathye Gaines, Mason City branch office manager for Consumer Credit Counseling Service of Northeastern Iowa Inc.
Payday lenders typically require borrowers to have a checking account and a steady income. The individual writes a post-dated check which is held for 14 to 30 days depending on the specific lender.
If the lender deposits the check without sufficient funds in the bank, the individual faces fees and possible jail time for writing a bad check.
This starts the cycle of payday loans. Without the money to make good on the loan, the individual is now forced to renew the loan at a very high interest rate or go to a different lender and take out another loan to pay off the first.
Gaines estimated that counselors in the Mason City office see about 10 people each month who have gotten themselves in over their head with payday loans. That's about 10 percent of the office's monthly caseload of approximately 100 clients.
"In order to make this week's bills, they are borrowing from next week's money," Gaines said.
She offered some case studies showing how consumers can get trapped in the payday loan cycle.
For example: Your rent is due on the fifth of every month but you don't get paid until the 10th. So you go to a payday loan business in Mason City and take out a loan to pay the rent on time and avoid a $45 late fee. This happens month after month.
Gaines said Consumer Credit has helped families in this type of financial crisis.
Gaines said after talking to the landlord and explaining the situation, the landlord agreed to let the family pay the rent on their payday for three to four months. Gaines worked with the family on a savings plan which allowed them to have the necessary financial cushion to make the rent payment on time in the future and avoid the payday loan cycle.
Another common situation involves trying to pay for an unexpected car repair.
Gaines said in one situation both parents worked to support the family, which included several small children. One parent worked out of town, so transportation was essential.
Then their car broke down. The garage wouldn't release the vehicle without being paid in full.
The couple didn't have the cash and went to a payday loan business in Mason City. But when the first loan came due they didn't have enough extra money in their budget to cover it. They ended up going to another payday loan outlet to borrow money to cover the first loan. Gaines said the family now has two $500 payday loans racking up interest.
Such predatory lending practices are not illegal, as long as the lender spells out the terms for the borrower. However, Gaines said many people don't understand the legalities of the loans and how the interest adds up.
Gaines said people get caught in the cycle because they have no other options -- no access to credit, no credit cards, no family or friends who can help with a loan.
In one extreme case, Gaines said counselors at her office are working with a client who has five $500 payday loans outstanding.
"They're just trying to stay afloat," Gaines said.
Lyndsey Medsker is a spokesperson for the trade industry group, Community Financial Services Association, which represents two-thirds of the payday loan companies in the United States. She said most payday loan customers use the products as intended.
"I think the people that are the most vocal critics of the industry have never been in a position where they were short $100 or $200 between pay periods. The reality is that these people have very few places where they can turn," Medsker said.
She said traditional banks and credit unions don't offer short-term credit.
"One hundred percent of payday loan customers have a relationship with a bank but are going elsewhere," she said.
A woman named Audrey, who declined to give her last name, is the manager of Cash Exchange, a locally-owned payday loan business in Mason City. The owner is Ralph Smith.
"If somebody walks in my door, they are not guaranteed to walk out with a loan," she said. "I check everything pretty close. If I can see there is a financial situation there, I do try to advise them."
Like many payday loan outlets, Audrey has many repeat customers. Some people take out loans and then pay them off after receiving their income tax refund.
"Three months later they might start up again," she said.
The maximum loan an individual can borrow from Cash Exchange is $300.
With that $300 loan, they pay a fee of $38.89 after two weeks.
The business makes its money on the fees.
"These places have got a place here. People can't get a signature loan from a bank for $500 anymore," she said. "You have no place to go anymore."
Audrey said she does try to make sure people aren't working themselves into a hole.
"If I personally see it, I warn them of the dangers of it."
Gaines said users of payday loans are not confined to any socio-economic group.
"We see professionals doing this. It's not just low-income people," she said.
Gaines said a reluctance to discuss money problems keeps many people from coming into her office for help.
"They will go somewhere else before they ask for help," she said.
Consumer Credit has many programs to help someone facing a financial crisis.
Local lenders including banks or credit unions might be able to help. The Veterans Affairs Department, North Iowa Community Action or The Salvation Army are other agencies that might be able to help depending on the situation.
In some cases, Gaines will work with the payday lenders to make it impossible for an individual to get a loan.
The person's name is put on a list and circulated to all lenders in town. For some people, this is the only way to stop the cycle.
Gaines said if you are considering a payday loan, "read the fine print. It's very important to do that. You go in under stress. You need the money."
The Globe Gazette, Peggy Senzarino, Staff Writer
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