Payday lenders inspire mixed feelings from borrowers

New Pew report finds that payday borrowers feel both relief -- and that they are being taken advantage of.

Generally, payday loans are advertised as quick fixes for unexpected expenses -- a couple hundred dollars to hold borrowers over until their next paycheck. But a new report from The Pew Charitable Trusts released Wednesday found the average borrower ends up in debt for five months, paying $520 in finance charges for loans of just $375.

Some borrowers spend years in debt.

Evelyn Hatchett is a retired garbage worker in Houston. In 2006, she fell behind on basic bills, including her electricity and some car repairs. She was tempted by payday loans, thinking they would help her catch up financially.

But sister advised her to steer clear.

“Because she got caught up years ago,” says Hatchett. “But I said, ‘Oh no, they going to loan me this money. I’m going to get it, because it was good at the time.'”

The process seemed simple enough: she’d get $350 and pay back $425 in a couple of weeks. But when she couldn’t repay the loan all at once, she started paying just the finance charges. Then she got a new loan to pay off the old one.

Hatchett estimates she’s borrowed about $2,000 from payday lenders over the years, plus a separate $1,500 she borrowed against her car. By now, she thinks she’s paid back three to four times the original value of her loans.

“I would go to one company and then I’d go to another,” she says. “I had like five loans out at one time because that’s how desperate I needed the money.”

Pew’s study found nearly 40 percent of payday borrowers would have taken out a loan no matter what the terms were.  

Moreover, consumers have complicated relationships with these lenders, according to Nick Bourke, the director of Pew’s Safe Small Dollar Loans Research Project.

“They’re often talking to people behind the counter who do remember their names,” he says. “[Store employees] look [consumers] in the eye and they smile. They’re nice to them and they hand them money when they’re in a difficult situation.”

Like scratching an itch, the loans feel good for just a minute. Borrowers say they’re grateful for the money.

But they also report feeling taken advantage of and nearly three out of four respondents said they want more regulations on payday lenders.

Evelyn Hatchett is one of those consumers who hopes the rules surrounding these loans will change. She’s still paying down her debt -- currently about $700 across two loans.

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A company like FlexWage Solutions that allows employers to offer their employees advance access to their earned but unpaid wages is a great solution to the payday lending trap. It's not a loan, so there is no interest and nothing to pay back. Flexwage.com

As someone who works with a number of clients of payday, title loan, and what we refer to as cash loan (typically six month loans) lenders, I have firsthand experience on the effects and devastation this industry has on families.

In regard to your comments SusanGreen, in Alabama we have very few laws regulating this industry. It is not unusual to see interest rates exceeding 400% and I have seen rates over 600%. I understand the need to regulate the “Big Boys”, but why can we not regulate these businesses too?

The title loan companies claim to have lower interest rates. Instead of charging higher rates, they have a “pawn shop” charge which can exceed 100%APR on the debt. A few years ago I had an applicant who lived near the poverty line (today a family of four gross income of $23,050 or $1,920.83/month) for our program who borrowed $1,040. Her monthly minimum payment was $150.00. The pawn shop charge was $130.50. A year later after, making the minimum payment, her balance was $1,104.79. So why couldn’t she pay more than the minimum rate?

I would encourage anyone to attempt to live on $1920.83 a month (don’t forget to take out the taxes). If you live in public housing they are going to charge you $576.25 for rent (30% gross income). A utility in a very well built 1100 square foot house in my area is going to be around $200. Food is going to be expensive, even though you are using food stamps, coupons, and/or buying store brand items you will see grocery bills for the month for $450.00/month. In my area you are paying $740 for one child in daycare and extended day for a child in school is $200. But if you can get assistance (subsidy), you may be able to bring that cost down from $940 to $300. Gas this morning at one of the mom and pop shops was $3.65. Let’s say I spend $25/wk or $100 per month. You need to have a phone so you can get calls from work if they need you fo overtime and because your child goes to a school who no longer uses books, but computers you have to have internet service, the lowest plan your provider has is going to be $65/month. You are not willing to negotiate that expense because you don’t want your child to be stuck in this cycle of poverty. you want him/her to become all that God intends and to have every opportunity to lift themselves up. You also have to have mandatory liability insurance for your car (believe it or not, a lot of the families I work with do!), that is $80/month. That is $1771.25 in expenses per month. Out of you income of $1920.83 per month you will have 10% taken out for taxes. You take home $1,728.75. If you get sick, you don’t have insurance. If the car, which you used your tax return to buy from the side the road car salesman (its about 85% you have bought a lemon) breaks down you are (fill in the expletive). And you think people want to stay in this “lifestyle.” There are few ways out.

Jen Ray, let’s address your response to the story. Because of the use of Truth in Lending Disclosures, the industry is required to post the interest rate, the amount in finance charges and any other fees may be included. A number of the families who are getting these debts do not understand or are able to comprehend the legal and financial language in the disclosures. Often they feel pressured to sign the documents and take the loan because the alternative is to lose their home, pay the utilities, or even put food on the table. Furthermore they are told that they will improve their credit, if they cannot make the entire payment they do not have to worry, because the debt will be refinanced.

When approached on this issue the industry claims the reason for such rates is due to the failure rate of families unable to pay their debts. A local credit union in our area offers a loan of $500 for up to six months. The interest rate is 18%. Do they have clients who don’t make the payments? Yes. But, they have kept the program because it is profitable to their credit union members and it works. A majority of the clients make their payments and the 18% rate covers the credit union’s losses, covers their cost, and they make a profit.

This industry is corrupt, immoral, and un-ethical. I know there are good people who work for them and own them, but it is such a bad business. A number of years ago I was speaking at a panel discussion regarding homeownership, credit, etc. A lady in the audience asked a question to the panel regarding a cash loan she got and if it was building her credit. Everyone on the panel said no, that the dangers of the panel far outweighed the very short term benefit. Several of us discussed the interest rates and fees being charged. I was pulled aside afterwards by a pastor of one of our local predominantly African American churches. His comments have stuck to me since. “This is the closest we have to indentured servantry or possible financial slavery that we today.”

Financial problems like the ones you describe here can not possibly be solved by simply going father into debt. And shutting down the sources of these loans won't help these people either, because they don't know any other way to solve their problems.

I believe part of the answer is some kind of education for both the adults and especially for young people, so they are less likely to be duped, and so they understand the dire situation into which they are getting themselves when they try to solve debt with more debt.

I always check out this website before getting a loan - www.dollar-plan.com - My personal favourite are trusted payday because they can always get me a loan despite my poor credit history.

Has anybody complained about these payday loan companies getting bailed out by the taxpayer then using the bailout to pay mega bonuses to the upper management? No, the government and banking industry want to make it harder for those who depend on the occassional payday loans to get through any rough patches that come along. This so-called watchdog agency created by Obama should concentrate on the big banks like BofA, JP Morgan-Chase, and Wells Fargo. these companies are trying to foreclose on loans that have been renegotiated through federal programs. Thousands of people are losing their homes because of these companies not keeping track of payments made to their subsidaries which more than a few have gone belly-up and misfiling of paperwork. These mistakes are costing the homeowner billions on top of their homes. Obama's watchdog should be looking into these breaches of contracts instead of the payday loan industry.

Honestly, I do not understand why so many customers have problems with payday loans. Don’t they know the interest rate when they take out a loan? Whe they are so surprised when it comes time to pay off the loan? I don’t want to sound rude but I really don’t understand. There’s no easy money in the world, even if someone offers you to get quick and easy cash you should keep in mind that everything has a price. Payday loans are intended for emergency situations when a person needs cash urgently but have no one to apply to. And payday loan lenders provide financial assistance with minimum requirements and in extra short terms so they take a high risk and charge high nterest rates. There are lots of stories when consumers got into the debt circle ad couldn’t pay off their loans, so it’s worth to think well before using this service to avoid misunderstandings and problems.
Jennifer Ray from https://paydayloansat.com/

These 'businesses' exist to prey on the uneducated, who more often than not don't grasp what the implications of the high percentages. Yeah, common sense to those who have no need of these types of loansharks, but not common sense for those that do. You can hide behind all the veils of fluff marketing verbiage you want, and you may even believe them, but that doesn't change what you do.

I realize people sometimes get into a bind with even the best of planning, but Good Lord people, if you had set up even a small emergency fund in the first place you would never have gotten into this mess. And if you couldn't afford to set up that fund, how do you Ever expect to be able to pay back a loan (particularly one that will likely cost you many times the size of that neglected fund).

Do we really think the problem is the lenders? I think maybe the answer to all this is to require some kind of basic financial education in our public schools that would address these specific real life issues before they happen.

Agreed. Available education to those unaware of these types of situations.

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