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Payday Loans - Legal Loan Sharking?
Each day, in cities across America, people go to payday loan
companies, seeking a temporary escape from their financial
problems. But that quick fix comes with a hefty pricetag
attached--interest rates that can run 400 percent or more on a
two-week loan. The fees on such loans, in fact, can become so
huge that they rival monthly rent bills.
Supporters of the payday loan industry say that such shops are
simply providing a public service, and that there's great demand
for emergency loans in today's economy. They also point out that
borrowers are not coerced into obtaining loans, that people
apply for the money knowing the costs involved.
However, there's a growing body of evidence to suggest that
payday loan companies target the working poor, minorities, and
military families. In other words, these lenders are accused of
preying upon some of the most vulnerable members of society, the
kind of people who don't have a financial safety net to fall
back on.
For instance, the head of the consumer protection group known as
WashPIRG in Washington state has stated that the aim of the
industry is to take advantage of a certain group of targeted
people. WashPIRG further states that payday loan guidelines can
be confusing, causing borrowers to become caught in a web of
debt. Moreover, payday loan operations are often largely
unregulated, since they may be exempted from state usury laws,
which place limits on the amount of interest lenders can charge
customers.
And payday loan outlets tend to be located in areas where they
will attract the most traffic from people who may be least able
to afford their services. For instance, in Washington state,
more than 36 payday loan stores are situated within three miles
of the Fort Lewis/McChord Air Force Base. Also, the lenders tend
to locate in areas with a high percentage of black residents.
Black areas might have as many as twice as many payday outlets
as white neighborhoods. This is true, not only in South Seattle
and other areas of Washington state, but also in Illinois and
Louisiana, where payday loan operations tend to set up shop in
minority and impoverished areas in Chicago and New Orleans.
As you might expect, the payday loan industry sharply denies
that it targets blacks and the poor. In fact, the industry's
spokespeople claim that their shops serve the middle class. For
instance, one lender, Moneytree, contends that stores are
positioned to be near banks and retail outlets and that
demographics don't enter into the equation. And the industry
points to statistics which indicate that borrowers earn, on
average, $25,000 to $50,000 each year.
However, the Consumer Federation of America sharply disagrees.
The consumer advocacy group maintains that payday loan stores
cater to low-income people who hold jobs. While they may have a
checking account and a regular paycheck, these wage-earners
often have little in the way of savings. As a result, they are
prime targets for emergency cash loans. And, once they become
payday loan customers, they can find it difficult to break free
of the debt spiral.
In their defense, representatives of the payday loan industry
say that they discourage irresponsible borrowing. They also
maintain that they are willing to create payment plans for those
who have difficulty repaying their loans. And, in some cases,
borrowers can pay back loans within a day without incurring any
charges. Spokespeople for payday loan companies note that
borrowers know about interest rates ahead of time and the
requirements of the loan are fully disclosed.
However, there can be little argument that, once people take out
a payday loan, the chances are great that they will be return
customers. About 25 percent of payday loan clients used the
service anywhere between 10 and 19 times a year--a statistic
which emerged from a survey by Washington state's Department of
Financial Institutions.
For someone who takes out a loan of $300, the fees can run as
high as $600--an amount consumer activist groups label as
excessive. And the problem may be growing. More than 20,000
payday loan shops operate across the nation. In some areas,
borrowing for payday loans has doubled in the course of a single
year. In fact, in some states, payday loans are now a billion
dollar industry.
Despite the protests from payday lenders, it appears that the
working poor and minorities are suffering as a result of payday
loan practices. Without significant personal financial reserves,
these people are easily lured into payday loan shops, with their
promises of fast, convenient emergency loans. However, they can
quickly find themselves mired in larger and larger mountains of
debt--a cycle of borrowing which can be difficult to break. At
times, the debt can be so great that borrowers contemplate
bankruptcy. Therefore, payday loans can be seen as an obstacle
in preventing the working poor from moving up the economic
ladder.
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