With the holidays approaching, William was short on cash. This was not a seasonal problem for the 45-year-old Scottsville resident, who moved to the area from another state about one year ago. Though William has a job, he says it pays less than the one he previously held. The smaller paychecks have been rough for him, but he deliberately avoids credit cards to help him ride out budget crunches.
“Credit cards get you in trouble,” he explains.
So instead, as he’s done several times during the past year, William walked into the Checks Cashed in the Cherry Avenue Shopping Center, one of six payday loan stores in the Charlottesville area. After a simple process in which William signed and left behind a check for money he didn’t have, he walked out with $250 in cash.
On a cold Thursday night some time later, William walked back into the bright, neon-adorned office of Checks Cashed. This time, he was holding $287 in cash, the required amount to cover his check. The extra $37 was the fee for his $250 loan.
The payday loan business is a numbers game. And when the math is done, it’s clear that the house always wins. The scheme is called a “payday loan” because a borrower is supposedly getting a cash advance on his next paycheck. The practice is also referred to as a cash advance or check advance.
To get a payday loan, the borrower first must prove he has a job and an active bank account. Then, he writes the lender a check for the amount of the desired loan, which is given to him in cash. No credit check is run during the process—a huge enticement for many people. The payday lender agrees not to cash the check, but keeps it as collateral until the loan and a fee are repaid.
The fee on William’s loan was based on the standard $15 per $100 loan in Virginia, which is the maximum fee payday lenders can charge in the State. The minimum time period for repaying the loans is seven days. If William repaid his loan in a week, the annual interest rate would amount to a whopping 782 percent. If he waited 30 days, it would be 183 percent. Should he not repay the loan in time, he could be sued.
Despite the steep cost of his loan, William isn’t complaining. He’s embarrassed that he has had to resort to payday loans, refusing to give his full name to this reporter, but he defends the service.
“It’s come in handy,” William says.
He says his cash flow problems are temporary. “Eventually, I won’t need it,” William says of payday loans.
But his optimism seems unfounded. William admits to getting a payday loan at least every two months. He’s obviously cash strapped, and the mounting fees must worsen his financial headaches. Yet William claims he’ll be able to escape the grasp of payday loans and fees. “I will. That’s no problem,” he asserts.
According to Jay Speer, a Richmond- based staff attorney for the Legal Aid Justice Center, payday loan fees force many customers like William into such a deep financial hole that they end up taking loans from one payday lender to repay the loans and fees from another. Getting a loan rolled-over or extended is illegal in Virginia, but Speer says some people bring in cash to settle an old loan, and immediately write a check to take out a new one from the same payday loan store.
“I think most people think it’s a one-time thing. They have no idea that they’re getting sucked into a long-term relationship,” Speer says. “Once they get you, it’s very hard to get out.”
A report from the Virginia Bureau of Financial Institutions supports Speer’s claim. In the first six months after payday loans became legal in the State, the typical borrower took out almost five payday loans—an average of a loan every five to six weeks.
“There’s no real way to address that at this point,” says Susan Hancock, the deputy commissioner of the Virginia Bureau of Financial Institutions, of repeat payday loan customers and the “vicious cycle” of going to one payday loan office to pay off a previous loan.
Consumer advocates say the payday lending industry relies on this repeat business, and preys on lower-income and minority families, as well as on military personnel.
“Visits to payday lending stores—which open their doors in low-income neighborhoods at a rate equal to Starbucks opening in affluent ones—are threatening the livelihoods of hardworking families and stripping equity from entire communities,” said Julian Bond, chairman of the NAACP and UVA history professor, in a recent news release.
The six payday loan centers in the Charlottesville area are located on: Cherry Avenue, which is in a lower-income, predominately black neighborhood; in the Rio Hill Center—the County’s bargain shopping district; on Carlton Road in blue-collar Belmont; in the shopping development that serves as a margin between the City and University and sits across Emmet street from the Barracks Road Shopping Center; on Seminole Trail across from Lowe’s; and near the ABC store and Burger King in Ruckersville.
According to a recent report by the North Carolina-based Center for Responsible Lending, which has long been a thorn in the side of the payday-lending industry, 91 percent of payday loans are made to people who take out five or more payday loans per year. The report estimates that these people, whom the consumer group labels as being caught in a “debt trap,” shell out $3.4 billion in fees each year.
But while critics deride payday loan centers as “legal loan sharks” who drag lower-income families into a nightmarish pyramid of growing loans and fees, the payday industry paints a far different picture, claiming the service helps people avert a cash emergency. Proponents also argue that payday loans help working families rather than prey on the poor, and cite a Georgetown University study that found roughly half the industry’s customers have a household income of more than $35,000 per year. Payday lending representatives claim their loans help a working family make ends meet when the car’s transmission goes or when junior needs that saxophone.
“I really think that this industry is a classic example of the marketplace making a need that somebody or someone fills,” says Vicki Woodward, a vice-president for Advance America, a leading national chain of payday lenders, which has a store in the Rio Hill Center.
Woodward, who also serves as the spokesperson for the Community Financial Services Association of America, the trade group that represents most of the payday loan industry, says her industry has “concern for customers who have become overreliant” on payday loans. She says payday lenders must provide explicit descriptions of the costs and responsibilities of their loans, and that the process is designed to “give pause” to borrowers.
But this cautious atmosphere is nowhere to be seen in the ubiquitous advertisements for payday loans, which are peppered with pictures of gleeful customers holding fistfuls of cash and slogans like “quick, easy and hassle free!”
Woodward says payday lenders fill a void left by banks, which have mostly stopped offering small loans in recent years. She also cites growing charges for bounced checks, ATM machine usage and credit card late fees as reasons for growth in the payday loan industry.
“There’s not many places to turn for this,” Woodward says of people in need of a small loan. “The vast majority of customers use payday advance properly, and what we could call moderately.”
Woodward says payday borrowers appreciate the service, and the industry claims a low number of customer complaints. State authorities back up this assertion.
“Relative to the number of transactions, the complaints have not been bad,” says Deputy Commissioner Hancock.
While consumer advocates vigorously dispute the payday loan industry’s claim of providing a helpful service to its consumers, both sides agree that banks are responsible for the emergence of payday loans.
“[Banks] are not providing adequate, fairly priced loans to consumers, which means the predatory payday lenders can flourish,” says Ed Mierzwinski, the consumer program director at the U.S. Public Interest Research Group, in an e-mail.
A wave of bank consolidations and mergers followed the major banking deregulation of the ’80s and early ’90s. A profusion of new bank fees followed, and small loans became tougher to find. For instance, SunTrust doesn’t offer loans under $3,000. Virginia National Bank will give loans to certain customers, but not for any amount under $500. Both banks do, however, feature overdraft protection, which could take the place of a payday loan for cash-strapped consumers. With overdraft protection, a bank offers credit to cover an overdrawn account—for a fee and/or interest. For VNB, overdraft money includes a 15.5 percent annual interest rate. The SunTrust overdraft option tacks on a $10 fee for every $100 borrowed.
Though not cheap, overdraft and other conventional banking solutions—with the exception of bounced checks—are generally cheaper than payday loans. But with fees rising for ATM transfers and even balance inquiries, people are increasingly looking toward the bright lights of payday loan stores. Since payday lenders first hit the scene in the early ’90s, the industry has exploded. At the beginning of 2003, more than 15,000 payday loan stores were operating around the country—a 50 percent increase in only two years. Payday lenders make $25 billion in loans each year to roughly 12 million households, according to industry estimates.
Payday lending came quickly to Virginia, sometime in the early ’90s, when check-cashing stores in the Tidewater region began giving unlicensed small loans, according to Jean Ann Fox, Yorktown-based director of consumer protection for the Consumer Federation of America. Though check cashing and payday loans often go together, and can sometimes be found under the same roof, they deal with a different clientele. Payday borrowers have jobs and checking accounts while checks cashed customers are often of the “unbanked” variety.
After a contentious debate, in 2002 the Virginia Legislature passed the rules for payday loans. Prior to this, a few payday loan stores had been operating in the State by partnering with national banks and thus avoiding Virginia regulation and the 36 percent cap on small loans.
State Senator Creigh Deeds, who represents the Charlottesville area, voted for the payday lending measure, though he says he thought long and hard about it.
“In an ideal world I would say payday lending would not be necessary,” Deeds says. But he says people need short-term loans, and that the market for payday lending was there.
“It wasn’t like we could make this industry go away,” Deeds says, adding that the final legislation was an attempt to “make some lemonade—even though it’s sour—out of lemons.”
The legislation went into effect on July 1, 2002, opening the door to payday lenders in the midst of a major economic downturn—the perfect market for payday lenders. Six months after the legislation went into effect, the state had 377 payday loan locations, and $165 million had been loaned out. Hancock says that since then the total number of locations in Virginia has grown to 623, with more licenses still pending.
While the payday loan industry’s trade group speaks of helping Americans get over a financial hump, the less sophisticated side of the business makes it clear that payday loans are indeed about wads of cash. “And the best part of all, most of your customers are repeat customers!” breathlessly exclaims the Web site cashnow.com. “Repeat Customers = Residual Income.” Another site also aimed at would-be lenders estimates that the average payday loan location clears $25,875 per month in loan fees.
But their loans are not usury, say industry representatives. Indeed, both the payday loan industry and its critics offer many statistics to compare its pricing to other forms of borrowing money [see sidebar].
For example, industry critics PIRG and the Consumer Federation of America issued a report showing that payday loans are far more expensive than credit cards. Calculated with fairly standard interest rates and fees, the report claims that the finance charge on a $200 credit card cash advance that is repaid in one month would be $8.41—a yearly interest rate of 50.46 percent. At the rates available in Virginia, a $200 payday loan would include a fee of $30. The annual interest on the loan would be 183 percent.
“Credit cards are expensive, but they’re still cheaper than a payday loan,” says Jean Ann Fox of the Consumer Federation of America.
Not always, says Woodward of the industry group. Slinging her own math, Woodward argues that the credit card fees for a late minimum payment could be $27 for a $100 credit card balance, which could trump the payday loan fee. Woodward also cites overdraft protection fees, bounced check fees from banks and merchants, utility bill late fees and even ATM charges, all of which can charge more interest than the typical payday loan in Virginia.
Though Woodward concedes that payday advances are not always the best option, she says they are always cheaper than a bounced check, the average fee for which is $25 per check, and merchants often charge their own fees in addition to the bank.
“It’s just like any other product, you have to weigh it against other alternatives,” Woodward says.
William chose to drop $37 at the loan center on Cherry Avenue instead of putting the $250 on a credit card and slowly chipping away at the credit. Why?
William says he has experienced more than his share of credit card debt woes in the past. For him, a quick payday loan was a simpler option than dealing with credit cards.
Fox says this is a common sentiment among the payday loan set. Some people are in deep with credit cards or don’t even have a card. Others have a bad credit rating. Perhaps most importantly, the ads for “cash now!” make payday loans seem so easy. With no nagging bills and no credit check, it’s over and done in minutes.
“It’s quick and it’s easy and it’s fast, and they have neon signs,” Fox says. “Who wouldn’t want to be able to write checks when they don’t have money in the bank?”
In essence, payday loans have become the fast food of the banking industry—an analogy that is bolstered by the profusion of payday loan stores. “It’s worse than 7-Eleven,” Fox says of the hundreds of payday loan centers now sprinkled around Virginia.
And it’s an industry that’s likely here to stay.
“Once you get the industry established in the state, it’s much harder to repeal it,” Fox says. “This industry is very generous, and they are big campaign contributors.”
For example, a recent Toledo Blade investigation found that Advance America, the nation’s largest payday loan chain and the company Woodward works for, hosted a fundraiser for Ohio Congressman Mike Oxley, who chairs the committee that oversees the industry. Advance America’s troops, the masters of quick cash, made sure that Oxley walked away with $42,000 in campaign donations from that single event.
Critics of the industry have pushed to subject payday loans to the 36 percent annual interest rate banks are limited to for small loans. They have also championed state-run databases like the one in Florida that identifies people who are stuck in a payday-loan debt cycle. Fox and other consumer advocates also suggest legislating a “cooling-off” period between payday loans for borrowers.
Woodward says the industry would oppose these reforms, and that the true goal of payday lending critics isn’t to protect consumers but to abolish the business altogether. As evidence, she says a 36 percent interest rate cap imposed on banks would be unworkable for payday lenders. And the industry claims that overheads and financial risks taken by short-term loan centers justify the steep fees.
“Frankly, they know that a company cannot make a loan for 10 cents a day,” Woodward says, citing the amount a payday lender could charge for $100 loan at the 36 percent rate. Furthermore, Woodward stresses the need to protect the right to small loans for customers who are “overwhelmingly satisfied with this product.”
When Governor Mark Warner signed the payday lender bill into law, he indicated that it was an issue that might warrant revisiting. And Sen. Deeds says he “has an open mind” about possible legislative protections for payday borrowers.
But as payday loan centers keep sprouting up in the State, and the industry continues to gain clout, slapping new regulations on the practice will not be easy. Some states have banned payday lenders outright. North Carolina flip-flopped, legalizing and later outlawing payday lending.
“A state can change its mind. It’s tough, but you can do it,” Fox says.
Ultimately, any attempt Virginia might make to crack down on payday loans will be hamstrung by the appeal of fast cash and the slippery world of the Internet. A two-second Web search turns up a ridiculous number of Internet-based payday lenders, some of which promise approval in 30 seconds and a transfer of funds within 24 hours. But the fees for Internet payday loans are sometimes double the Virginia rate.
With such hefty fees, there are few scenarios in which a payday loan makes any financial sense. Yet it seems only strong national legislation could successfully stamp out the fringe banking industry of payday lending. With legislators like Rep. Mike Oxley at the helm in Washington, buyer beware will continue be the governing principle behind the fast cash of payday loans.