Officials warn against using payday loans

BY MARCELLE HANEMANN

The Daily News

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The scenario is common and devastating. A family that lives paycheck to paycheck realizes they are not going to make ends meet one month. An important bill is due before payday. They could lose their car or their electricity.

So they take out a payday loan to hold them over. They post-date a check for the loan amount plus fees in return for cash-in-hand.

But when the repayment is due in about two weeks they are still behind, so they take out another loan with additional fees. The cycle could go on for months.

According to a report by the Center for Responsible Lending, a nonprofit, nonpartisan research and policy organization, the payday lending business model is designed to keep borrowers in debt, not to provide one-time assistance in a time of financial need.

Payday lenders reportedly collect 90 percent of their revenue as fees from repeat borrowers who cannot pay off their loans, rather than from one-time borrowers in short-term emergencies.

A short-term loan of $325 typically ends up costing the borrower $793 over a period of months, according to the CRL. Fees or interest generally reach the triple digit range.

The financially neediest are most at risk. The loans are written against not only employee paychecks, but also Social Security or government benefit checks, said Valerie Vincent, associate extension agent for LSU AgCenter. Besides the regular income, all a prospective borrower needs to qualify is personal identification and a checking account.

The CRL calls the practice a trap. A now common term for those who specialize in offering the loans is predatory lenders.

Predatory payday lending reportedly costs American families $4.2 billion a year in excessive fees. At $311 million, Louisiana ranks third behind only California and Missouri for highest cost of predatory payday lending by state.

Meanwhile, the payday loan industry is growing. The CRL estimates the loan volume is at least $28 billion a year, an increase of more than 100 percent in the past five years.

And the businesses are proliferating locally. Just a glance at the phone book indicates about a dozen payday or quick cash lenders in Washington Parish and at least a dozen and a half in St. Tammany Parish.

Darlene Crain, manager of Cash for Checks, the oldest such establishment in Bogalusa, said the lending company is a legitimate business designed to offer a service to the public. Her customers include teachers, retirees, Social Security recipients and veterans, she said.

A lot of them get only one check a month, said Crain.

"And they can't make it last a whole month," she said. "We help keep people from getting their electricity or their phones turned off. It's cheaper to pay us $25 on $100 than to pay a $75 or $100 reconnect fee."

Cash for Checks requires customers to pay off their entire loans within a two-week term, and offers a $25 discount for those who do so within five days of getting a loan, said Crain.

"It's their option if they want to borrow again or not," she said.

Most do, said Crain.

"They might pay it off on the third (of the month,) then come back two weeks before their next check," she said. "It helps them keep their gas on or keep their lights from getting cut off."

The business also cashes checks for people who don't have bank accounts or who either can't or don't want to wait for a settlement or other check to clear their banks. The loans themselves are a simple service, said Crain.

"They're hassle-free," she said. "They're quick. You can have your money in 10 or 15 minutes. And there's no credit check."

Still, Vincent urges caution.

"If you do not have the money you need, it's not likely you will have it in two weeks, so the loan will rollover for two more weeks with additional fees and interest, and that will happen again in two more weeks," she said. "Payday loans can become costly very quickly. It's kind of an endless cycle."

Vincent said she knows of one person who took out a payday loan to borrow $200. The fee was $38.

"A year later, she owed $1,220 in fees and still owed the $200," she said. "You can't borrow your way out of debt."

While some states have cracked down on payday lending, others exempt the lenders from limits on interest rates partly because the loans are generally for small amounts. Louisiana has enacted some controls, said Vincent.

"The Louisiana Deferred Presentment and Small Loan Act limits interest on loans not paid by their due dates to the original fee plus 36 percent interest for one year, and 18 percent interest after one year," she said.

Vincent added that the word "interest" is generally not used in payday lending agreements. Instead, they use the term "fees."

"This way, they reason, they don't violate state usury laws which cap the amount of interest that can be charged on loans," she said.

Borrowers should always beware.

Vincent advised anyone who is thinking about taking out a payday loan to consider other options. Utility and other companies will often work out payment plans, she said. Friends or family members might be able to lend the money. And taking out a small traditional loan might be a better bet.

Charging the needed amount to a credit card, obtaining a line of credit from a FDIC approved lender and asking for an advance from an employer are additional options.

Even paying a late fee can ultimately be less costly than paying the fees for a payday loan.

Vincent said payday lending is "problematic", especially with low income borrowers. She urges everyone to think twice before going for the quick cash.

Crain said her customers depend on Cash for Checks services and would be lost without them.

Alternatives to payday loans

- When you need credit, it is important to shop around. Look for the credit offer with the lowest annual percentage rate (APR)-consider a small loan from your credit union or small loan company, an advance on pay from your employer, or a loan from family or a friend. Some community-based organizations may make small business loans to individuals.

-Compare the APR and the finance charge of credit offers to get the lowest cost.

-Ask your creditors for more time to pay. Find out what they charge for a late fee, an additional finance charge or a higher interest rate.

-Find out if you have, or can get, overdraft protection on your checking account. If you regularly exceed the amount of money in your checking account, overdraft protection can help protect you from future credit problems. Learn the terms of overdraft protection.

Source: Louisiana Attorney General's Office