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A payday loan won’t always pay off

Mitchell Hartman Apr 28, 2009

A payday loan won’t always pay off

Mitchell Hartman Apr 28, 2009


Steve Chiotakis: A new law to protect credit-card holders is moving through Congress, and consumer advocates are pushing legislation at the state and federal levels as well. They want to crack down on another source of debt: payday loans. From the Marketplace Entrepreneurship Desk at Oregon Public Broadcasting, here’s Mitchell Hartman.

Mitchell Hartman: Cathy Kimpton is a registered nurse with a steady job. I met her outside a Rapid Cash store on the outskirts of Portland. She’d just paid off her husband’s latest payday loan.

Cathy Kimpton: Three hundred dollars, but I know I paid nearly $40 for that $300 loan.

If you’ve never taken out a payday loan, here’s how it works. Say you want to borrow $300. You write a personal check for the amount, plus perhaps an interest payment of 15 percent.

That’s the extra $40 Cathy Kimpton was talking about. You post-date the check a few weeks to your next paycheck. If you don’t come in and pay the debt, the lender simply cashes the original check.

Now, 15 percent interest over a few weeks may not sound bad. But it works out to several hundred percent annually.

Adair Morse at the University of Chicago Business School says there aren’t many options for borrowers in trouble.

Adair Morse: People go to pawn shops and car-title loans and things like this, but these all require some assets that you’re willing to put up as collateral. It’s pretty much after you get capped off on your credit cards, you really don’t have much choice but to go to a payday lender.

Lyndsey Medsker: The demand for this type of credit is undeniable right now.

Lyndsey Medsker is a spokesperson for the payday lenders’ trade association.

Medsker: You know anecdotally, we’re hearing from companies that there are more people walking through the door, there are more people calling. But that’s not translating into additional money being advanced. Mainly because part of the requirement is that you have proof of steady income. So as people lose their jobs, they no longer qualify for the advance.

Lenders I talked to say defaults are up significantly — borrowers bouncing checks or skipping out. So profits are falling.

More than a dozen states, meanwhile, have capped annual interest around 36 percent. Lenders say default rates are so high, anything less than triple-digits puts them out of business.

Uriah King of the Center for Responsible Lending isn’t shedding any tears.

Uriah King: Somebody that’s paycheck-to-paycheck can’t pay off a 400 percent interest-rate loan, plus pay off all their expenses. The payday loan just drives them deeper into the hole.

But finance professor Adair Morse says her research shows most borrowers do understand how much interest they’re paying, and don’t mind. They like the convenience. Better, she says, to limit how much of a paycheck someone can borrow against, and how many times they can roll the loan over and pile on more interest. That might keep people from slipping into a spiral of debt they can never repay.

I’m Mitchell Hartman for Marketplace.

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