Payday loans hook a sinker
Payday loan's hook a sinker
By Al Lewis
The Denver Post
Feb. 17, 2008
Clara Cichosz of Littleton couldn't stop pumping coins into the slot machines.
The spinning dials, the electronic bells, and the occasional clank of a jackpot had hypnotized her. She started going to Black Hawk without her friends, so she could be alone with the machines.
"I called myself a slot slut," she said. "I am a compulsive gambler." Despite working for a large telecommunications company for more than 30 years, Cichosz plunged headlong into bankruptcy in 2000. Her credit destroyed, she turned to payday lenders.
"Sometimes I would get a payday loan just to gamble, hoping that I would win," she said. "Of course, what happens is you don't win."
Eventually, she found herself taking out payday loans to pay off payday loans. She's now in a couple of 12-step programs trying to recover as debt collectors drag her into court and hound her at work for payments.
"All the overtime I worked last year was basically for these guys," she said.
Payday lenders are everywhere, ready to make cash advances against almost anyone's next paycheck. What was once a niche for leg-snapping loan sharks now belongs to corporations with brightly lit stores and publicly traded stock.
They prey upon the feeble, the infirm and the desperate. They also help people to whom no one else would make a loan.
To get a payday loan, borrowers write a post-dated check for the amount of a loan plus a fee. The payday lender collects this check at the end of the term, usually two weeks. For a $300 loan, a borrower writes a check for $360. After two weeks, if the borrower doesn't have the money to cover the check, the borrower can essentially refinance for another $60.
On average, the annualized interest rate for a payday loan in Colorado works out to 353 percent, according to a study release last week by the Bell Policy Center and the Center for Entrepreneurship. Using data from the Colorado attorney general's office, the study determined that the average payday customer here paid $544 to borrow $343 in 2006.
Rolling over temporary debt is outrageously expensive. But that's what people do. In 2006, 70 percent of all payday loans went to borrowers with 11 or more loans in the previous 12 months.
"They've created a product that is deceptively simple to get into and excruciatingly difficult to get out of," said Rich Jones of the Bell Policy Center.
Terri Verrette took a job as assistant manager at a payday store in Colorado Springs in December 2006. A single mom with a business degree, she looked forward to helping people with problems she had faced. "If you had a pulse, a bank account and a pay stub, you would get a loan," she said. "I thought it was a source of credit for people with no other alternative. But it wasn't just a source of credit. It was predatory lending."
Her customers didn't have to be compulsive gamblers to get snagged. Educated, middle- class people who lost their credit through divorces, layoffs and illnesses often washed up on her shore, again and again.
"One customer was just trying to buy medication for a family member with a serious illness," Verrette said. "She wound up with 14 payday loans. This was a woman with a comfortable income but with 14 payday loans - each for $500. Every single payday, she owed 14 times $75. It was eating her entire paycheck just for the fees. And she was forced into bankruptcy." Verrette said she couldn't take watching this human drama. She now works as program director for America's Family, a nonprofit financialcounseling organization in Colorado Springs.
Despite high fees, people often take out payday loans to meet everyday living expenses. In 2006, Sherry Wiggins of Aurora had just started a new job when her car broke down.
"I needed to get back and forth to work," she said. "I had to have a car." She paid for the repairs with a payday loan and has been rolling it over ever since. "When you go to pay back the loan, you still need money for your living expenses," she explained. "You are caught short, so you take out another loan. And this became a snowball effect."
Linda Medlock of Denver said she turned to a payday lender after she lost a job that paid $80,000 a year. She needed to pay her mortgage, as she refinanced her house to consolidate her debts. "I found myself going into a circle of various payday loans," she said. "I was borrowing from one payday loan to pay off another payday loan. . . . I had to keep paying my bills, to keep my credit up, so my refi would go
On Monday, Colorado lawmakers will hear testimony on a bill that would cap the allowable finance charges for payday loans at an annualized rate of 36 percent.
Dennis Bassford, chief executive of Seattle- based Moneytree Inc., told me that if this bill goes through, he will close his 13 locations in Colorado. It's odd to hear a businessman say he can't operate on 36 percent annualized interest. But that's apparently how it is.
"These are labor-intensive loans," Bassford explained.
They require storefronts with employees, equipment and utilities. Just managing paperwork for every $300 or $500 loan is expensive. Who else makes small loans for just two weeks - to people with little or no credit? And if they later feel trapped, there are 60-day workout plans required by Colorado law after four consecutive payday loans, Bassford said.
"Our biggest critics are people who never used the product, will never have a need to use the product and don't want you to have a choice to use the product," he said.
Bassford concedes that people can get in trouble with payday loans. People also get in trouble with credit cards and mortgages. "There are people who misuse all kinds of products in society," he said.
We live in interesting times, though. If a homeowner defaults on a mortgage, it's the mortgage company's fault for being predatory. Even our Republican president has pressured lenders to go easy on debtors. So it's not surprising to see forces cracking down on payday lenders.
The free-market ideal is buyer beware. But for thousands of years, civilizations have established usury laws to cap interest rates. They are society's attempt to prevent the rich from over-exploiting the poor. This year, banks, credit unions and credit- card lenders can't charge more than an annualized rate of 45 percent under Colorado law. But payday lenders can.
"Payday lenders got a special break on the state's usury law," said Jones of the Bell Policy Center. "All we're saying is let's close the gap."