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Payday loans: A good last resort?

Marketplace Staff Feb 28, 2008
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KAI RYSSDAL: Tomorrow’s Friday. Always good. Even better in a lot of places, it’s payday. For some, though, you ought to make that payback day. As the economy slides more people are making do week by week. And when the money runs out before the next check comes in, millions of them are turning to payday lenders. Interest rates on those are high but Marketplace’s Janet Babin reports from North Carolina Public Radio payday loans might actually be worth the price.


JANET BABIN: ‘Cash Tonic’ is just another bland store front in a strip mall in Los Angeles. But it’s a happening place on payday. Juanitha is one of the customers walking out with cash. She says she visits the payday loan store too much these days.

JUANITHA: Here lately I’ve been using it a little bit more. I’ve kind of got myself in a bind, you know. So it’s like paycheck to paycheck.

Juanitha and millions of others. The store-front payday industry made about $42 billion dollars in loans in 2006. That according to business analysts Stephens Inc. Most of the loans were for small amounts, hundreds not thousands of dollars.

If you’ve never taken out a payday loan, here’s how it works: say you want to borrow $300 dollars. You show the clerk your pay stub, or proof of a welfare or social security check. And you need to have a checking account because that’s how you pay the loan back. You write a postdated check that’ll be cashed on your next payday. The typical charge to borrow $300 dollars, about $45. People usually pay back the loan — they’ve got money coming in. The problem becomes living on what’s left of your paycheck. Many borrowers like Juanitha have to roll over the loan over just to stay afloat.

JUANITHA: Anybody that’s in the same circumstances I’m in would probably end up doing the same thing. You get caught up and you have to get a bill paid and you gotta do what you gotta do.

Payday loans have gotten a bad wrap because of their high interest rates. The businesses are in an ongoing struggle with state regulators. But a few new reports say the loans can actually benefit consumers. One is from a staff economist at the Federal Reserve Bank of New York. He looked at what happened in two states after regulators caped interest rates, and payday lenders closed up shop in response to the new laws. He found that consumers in those states ended up paying an extra $36 million a year in bounced check fees. The other study out of George Mason University came to a similar conclusion that payday loans could be beneficial. Economist Bart Wilson led that study.

BART WILSON: So when you give people more options, responsible people can take advantage of it and be better off.

Advocates like the Center for Responsible Lending, or CRL, argue that Wilson’s study took place in a lab, far from the real world. The group says the other study from the Fed used faulty data. Leslie Parrish is a senior researcher at CRL. She says payday loans set most people up for failure.

LESLIE PARRISH: The vast majority of borrowers continue to be trapped in a long term debt cycle with these 400 percent APR loans.

That cycle rings true for Adriana McQuillan of Wilmington, North Carolina. In 2002, she took out a payday loan to help pay her mortgage. Things sort of snow-balled from there.

ADRIANA MCQUILLAN: Eventually I ended up going to like three, because I had to finish. You have to borrow from another one to pay another one. It’s what I started doing. It’s like a never ending thing…but it was no way out.

Today McQuillan might be in an even bigger bind. That’s because North Carolina is among the dozen states that have caps on interest rates, and therefore don’t have payday lenders.

Nebraska and Colorado are also considering interest limits that could send the industry packing. Lyndsey Metzger is with the Community Financial Services Association, a payday loan trade group.

LYNDSEY METZGER: By eliminating store front payday lenders you’re only driving people to more expensive options that they were trying to avoid or even to unregulated offshore internet lenders which are popping up all over the place right now.

Metzger says without payday loan options, consumers suffer while banks and other financial institutions flourish from decreased competition.

I’m Janet Babin for Marketplace.

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