Payday Lending Stores (I.E. Loan Sharks) Flourish Despite Crackdown

Houston Chronicle, AP | 7 February 2003 | Mark Niesse, AP

[PetroniDE]

ATLANTA -- Pam Sanson's quick $300 loan ended up costing her more than $900 in interest in just six months.

Sanson had taken out a payday loan, a short-term loan with a very high annual interest rate -- 600 percent in her case.

Such loans are prohibited in most states because they exceed legal limits on interest rates, yet thousands of loan stores promising cash until payday continue to operate around the country -- especially in poor, minority neighborhoods.

The weakened economy has helped make these loans more attractive and even harder to pay off.

"It's like a virus spreading out there," said Georgia Insurance Commissioner John Oxendine, who has been trying to crack down on lenders who prey on the poor. "It's very frustrating -- we'll shut one guy down and a couple more will pop up."

Sanson, who lives south of Atlanta, borrowed the money last January and wrote a check for $375 that the lender agreed not to cash as long as she and her husband paid the $75 interest on the loan every two weeks.

"At the time, we were both working, and I didn't see any reason I wouldn't be able to pay it off the following payday," she said.

But her husband lost his job and her hours at Wal-Mart were cut. Eventually, Sanson couldn't afford to pay the $75 interest, much less the $300 principal. Her check bounced and USA PayDay threatened to send detectives to put her in jail, she said.

"That's when I got scared and started calling around for help," said Sanson, who hasn't heard from USA PayDay since she contacted the state insurance commissioner's office.

There are as many as 24,000 payday loan stores nationwide that take in $2.4 billion in fees and interest each year, according to a 2001 report from the Consumer Federation of America. The companies charge as much as $30 every two weeks per $100 borrowed, the equivalent of a 720 percent annual interest rate.

The companies are able to evade state limits on annual interest rates -- typically between 25 percent and 60 percent -- by using a loophole in the National Bank Act. The law allows "rent-a-bank" agreements in which payday lending chains pair up with banks in states with lax lending laws, allowing the lender to "export" high interest rates.

For example, USA PayDay gets its customers loans from a bank in Delaware, which along with South Dakota doesn't cap interest rates and has favorable tax laws.

Officials at the Office of the Comptroller of the Currency, which charters federal banks, have gotten four federal banks to discontinue their dealings with payday lending companies by claiming that they weren't doing business in a safe and sound manner. That forced Advance America, Cash America, ACE Cash Express and Dollar Financial to stop using federal banks for payday lending.

But those companies still use state banks to get money for loans at high interest rates. State banks are regulated by the Federal Deposit Insurance Corp., which hasn't pursued payday lenders as aggressively as the OCC.

[PetroniDE]

And you think interest rates on credit cards is high.

[SoDak]

I'm about as capitalist, conservative, and laissez faire as ya get, but I'd like nothing more than to see these vampires shut down.

[wideawake]

Nobody held a gun to these people's heads telling them to borrow beyond their means.

Why are they going to loan stores? Because banks won't lend them money. Why won't banks lend them money? Because they are very risky borrowers.

Therefore the loan stores ask for increased interest to compensate for the increased risk of lending the money out.

If you don't like the loan stores rates, don't borrow from them and manage your finances more intelligently.

[clintonh8r]

Exactly. Since FL effectively shut down the car title lenders by excessively restricting their interest rates, people who are high credit risks have little or no access to credit.

[AppyPappy]

I look at "payday shops" like I look at people who rip off retarded people. Basically, the same thing.

[Guillermo]

I agree with you.

[wideawake]

So people who have bad credit and can't get a credit card are, by your definition, retarded?

Should the government therefore intervene to "save them" from the unwise decisions they make?

Should everyone with credit so bad that no bank will give them a credit card be given government-sponsored loans at 1.25% interest?

[AppyPappy]

People who get an advance on their pay check at $75 a month interest are retarded.

[AppyPappy]

Sorry...$75 every two weeks

[Dbdaily]

I think you would be surprised at the number of people with modest homes and newer cars who give the appreance as normal middle income good credit risk type people that borrow from these places because of being over extended. But you are right nobody holds a gun to your head when you borrow from these Guys.

[Protagoras]

I'm about as capitalist, conservative, and laissez faire as ya get, but I'd like nothing more than to see these vampires shut down.

If you mean by law, you aren't Laissez Faire

[Protagoras]

I look at "payday shops" like I look at people who rip off retarded people. Basically, the same thing.

People who make bad business deals are to be protected by law because they are retarded?

[Guillermo]

I agree as well. And at the same time are people forced to do anything with a gun to their head.

[AppyPappy]

Yes they are.

[Protagoras]

Of all tyrannies, a tyranny exercised for the good of its victims may be the most oppressive." -- C. S. Lewis

[Protagoras]

Ah, the nanny state. A well known conservative tenet.

[AppyPappy]

Ah good old Libertarians. You can put glass in baby food as long as you have a warning sticker.

[Protagoras]

I make bad business decisions all day everyday while trading the market. Maybe they should shut down the stock markets.

[Protagoras]

You can put glass in baby food as long as you have a warning sticker.

Fraud is a violation of rights.

[wtc911]

Look outside the gates of any major military post and you'll find dozens of these leeches (eg. Victory Drive outside Benning). They prey on young, unsophisticated servicemen...like those about to jump ugly with Iraq to keep you safe. Care to rethink the retard remark?

[AppyPappy]

Hopefully, you aren't retarded.

[Protagoras]

Hopefully, you aren't retarded.

My accountant doesn't think so.

[weikel]

Sorry usury laws are nothing more than price fixing on loans and I oppose that on principle.

[AppyPappy]

No I don't.

[Protagoras]

Sorry usury laws are nothing more than price fixing on loans and I oppose that on principle.

Bingo

[-YYZ-]

So I guess the question is, just how exorbitant of interest rates should be allowed, and will that limit some people's access to short-term loans?

The few times I've ever been this tight for money, I took something of value I owned to a pawn shop. They had to keep it for a month before selling it to someone else. I paid 30% "interest" for the privilege. If for some reason I couldn't pay to get it back, they'd sell it and I'd be in the clear. I thought it was a more or less "fair" deal.

[SamAdams76]

I don't understand why somebody would pay $75 every two weeks for a $300 payday loan. I mean, if they are getting the $300 anyhow, why not just wait until payday? And if they are so strapped for cash that they can't wait until payday, then how to they expect to afford the $75 bi-weekly interest?

Anyway, like another poster said, it's not just low-income people who are strapped for cash these days. Many seemingly affluent middle-class people are living payday to payday. These people have a hefty mortgage, two car payments and credit cards maxed out. They are a layoff away from disaster.

[weikel]

I don't think the average soldier is stupid the concept of a loan plus interest isn't complicated a smart hick wouldn't fall for it, its not an issue of knowledge or sophistication but of intelligence.

[wideawake]

People who get an advance on their pay check at $75 a month interest are retarded.

That's 20% interest.

I know plenty of unwise individuals who use credit cards charging 15-17% and who manage to run up balances exceeding half their annual salaries, so that between rent and servicing their credit card debt they barely have enough money left for anything else.

These are college grads who work in insurance, marketing, etc.

I guess the difference between being a junior account executive and a mentally-disabled unfortunate is 3%.

[Henrietta]

"I'm about as capitalist, conservative, and laissez faire as ya get, but I'd like nothing more than to see these vampires shut down."

If you have stated your true feelings, then no, you are not as capitalist, conservative, or laissez faire as they come. Far from being "vampires," these businesses provide a valuable service for people who are too much of a bad credit risk to get loans anywhere else.

If the thought of someone making money off of giving short term loans distresses you so, then please go open up a business that gives short term loans at rates of interest comparable to what banks charge. You wouldn't last long, I can guarantee you.

Most of the people patronizing these businesses have terrible credit because they have been financially irresponsible. The "vampires," as you call them, have to charge high interest rates just to make a living at this business, because when these people can't pay, they just try to bilk the moneylender, just like the woman in the story.

[AppyPappy]

It was every two weeks, not every month.

[AppyPappy]

And $75 a month on a $300 is not 20%. In a year, it would be much more than the principal. It's more like 300%.

[wtc911]

Then why do these places cluster around the main gate, not in the malls? They go where the market (and money) is. The point is not one of intelligence but of sophistication in the world-wise use of the word. The average E2 is how old? Nineteen? What did you know at 19? These places use the most deceptive of names, eg, "Patriot Loans". The crime is that these young people are not strongly cautioned by the military against these thieves.

[wideawake]

An excellent point.

My wife and I make a point of keeping two years' worth of expenses in liquid investments just in case something bad happens.

I have a real fear of that kind of overextension.

[agarrett]

People who get an advance on their pay check at $75 a month interest are retarded. That's 20% interest. I know plenty of unwise individuals who use credit cards charging 15-17% and who manage to run up balances exceeding half their annual salaries, so that between rent and servicing their credit card debt they barely have enough money left for anything else. These are college grads who work in insurance, marketing, etc. I guess the difference between being a junior account executive and a mentally-disabled unfortunate is 3%.

  Sorry wideawake, but you've made some mistakes here.

  First, $75 on $300 is 25%, not $20%. Second, that is per month, so the actual rate would be 400%.

  So, your final line should read "I guess the difference between being a junior account executive and a mentally-disabled unfortunate is 383%." I'd agree with that.

  Check your math next time.

Drew Garrett

[HELLRAISER II]

The State of Georgia just enacted a new law called(GAFLA)on Real Estate loans for Banks and Mortgagors that limits the banks APR to Prime + 4% which would currently be 8.25% and also limited the amout of total bank & broker fees to 3% As a result the people that have crappy credit can't even get a loan period because the lender won't lend them any money if they can't charge more and yet they let these blood suckers screw people every day.

[arm958]

The crime is that these young people are not strongly cautioned by the military against these thieves.

B.S. As a former First Sergeant, I can assure you that their leaders are constantly informing them not to do business with these crooks. Some listen; some don't.

[HELLRAISER II]

They at least have to be labeled as a dumb $hit, although I do admit that it is unfortunate that their that stupid and that the businesses are that unscrupulous.

[wideawake]

Good point. I saw the figure $375 as I glanced back through the article and failed to separate it from the $300 borrowing base.

So that would have been 25% a month.

At 25% biweekly that's actually 600% annually.

But the loan is also meant to be paid back in two weeks, not one year.

[wideawake]

Precisely. These guys are ensured a profit because banks are prohibited from providing a market rate of interest.

[discostu]

Appy's quote is 25% and he got it wrong. The actual payment is $75 every two weeks which makes it 50% a month, even department store credit cards don't go that high. Also these loans don't roll over interest the way credit cards do, they work just like mobsters. The "interest" is the vig, you owe that every payment period and NONE of the payment counts towards principle. So it's only 25% interest if you manage to pay it off on the first payment date. By the 4th payment date it's 100% interest. The way the cycle goes you can keep paying your vig forever, since none counts to principle; at some point the borrower still has to scrape up the principle over and above the latest vig. Actually even mobster count a little of the vig against the principle. Which tells you something about these payday loan guys.

Another difference is that payday loans aren't part of your credit history, if you're good about paying that high interest first credit card you get a good credit rating and eventually can trade up for a better card (or better rate on that card). None of that happens with payday loans.

All that being said "caveat emptor" is still the rule of the land. Make a bad business deal pay the price. One of the things I learned when young and poor was how to float a check through payday, just takes a little timing and some creative check dating. These things are for people that aren't even that smart.

[wideawake]

See my post 39.

[AppyPappy]

Irregardless (not really a word but I like it), the interest is per annum.

[HELLRAISER II]

Just for the record the state usury laws are at 16% with a 60% APR cap, but they aren't a bank so they can continuously screw people.

[Romulus]

Sorry usury laws are nothing more than price fixing on loans and I oppose that on principle.

How interesting.

[wideawake]

The way the cycle goes you can keep paying your vig forever, since none counts to principle

Kind of like interest-only mortgages?

[wtc911]

You know, I hoped that I would be corrected on that point, thanks. I fear though that the message doesn't get through. My evidence is the proliferation outside the gates.

[discostu]

The big mistake most ofthe customer make, which the payday guys are counting on, is they borrow their entire paycheck (or their average). If one is living paycheck to paycheck (which you'd have to be to go to these guys) then you probably don't have the vig lieing around on top of the paycheck, and even if you do you probably don't have the vig PLUs some money to eat on and pay other bills. So they roll over the loan (ie pay the vig and leave the principle outstanding) out of necessity and the cycle is born. It's a great scam.

[Protagoras]

Price controls set by government at the point of a gun are not usually a conservative tenet. They used to be opposed to government control of the economy.

Now so called conservatives back minimum wage laws, price controls, and all other manner of fiscal mischief. It's sad.

[weikel]

Do you support a free market without price fixes or are you a socialist?