February 3, 2009:
Payday loans, typically a way working-class people get cash in a pinch, are increasingly being sought by middle-income families living without a cash cushion.
Lenders and others say the short-term loans are being taken out by people who used to get needed cash from a bank, a credit union or a credit card. With the recent credit crunch and recession, high-interest payday loans have become an alternative.
Payday loan representatives say they provide a needed service to people without good credit who need short-term credit. But some warn that once in the system, borrowers can get into a cycle that eats up their paychecks with annual interest rates of nearly 400 percent.
More middle-class families are using payday loans "to put off the day of reckoning," said Elizabeth Warren, a Harvard law professor who is chairwoman of a congressional watchdog panel on the $700 billion bailout for the U.S. financial system.
"Too many families live with no cushion, so when something goes wrong, they turn to payday lenders."
Payday loans are so named because they provide a borrower with cash until the following payday, typically within two weeks. All that is needed is proof of employment and a post-dated check payable to the lender for the amount of the loan plus a fee.
The maximum amount that can be borrowed varies from state to state; in Indiana, the maximum per loan is $550, with an annual percentage rate of 349.36 percent. The lower the loan, the higher the APR. If the $550 loan is repaid on time, the fee is usually $72.
People get into trouble when they can't repay the loan and renew it multiple times, each time paying the fee. Indiana restricts to six the number of times a borrower can get consecutive loans.
Consumer credit counselors nationwide advise against taking payday loans.
Kathy Perron, president of Momentive Consumer Credit Counseling Service in Indianapolis, called payday loans "a very costly way to do your banking" because of the high interest rates and fees.
By various estimates, Americans now pay as much as $8 billion a year to borrow $50 billion from payday lenders.
In Indiana, Hoosiers borrowed $530 million from payday lenders and paid $73 million in interest charges from November 2007 to October 2008, according to the Indiana Department of Financial Institutions. The department is not required to regularly track payday loan transactions, so the agency has no comparative information.
Payday lenders' profits are only slightly higher than those of banks and other financial institutions, according to a December 2007 study by Vanderbilt University Law School and the University of Oxford.
And payday lenders point out that a loan from them is still cheaper than paying a store's bounced-check penalty or a credit card company's late-payment fee plus interest.
With about 30 stores in Indianapolis, Advance America, based in Spartanburg, S.C., has "seen over time our customer profile inching toward a higher income," said spokesman Jamie Fulmer.
The average household income for Advance America customers has risen to $43,000, with 90 percent holding at least high school diplomas and half with some college. About half have credit cards, Fulmer said.
"In terms of seeing a huge number of new clients, that is not being realized" in the recession, in part because payday lenders require their customers to have paychecks and not be out of work, said Jeff Kursman, spokesman for Cincinnati-based Check 'n Go Corp., which lends in Indiana and 30 other states.
Nationwide, the number of payday outlets has exploded from zero in 1990 to about 25,000 today, buoyed by the widespread exodus of mainline banks and credit unions from the short-term loan business.
In Indiana there are 430 payday loan locations, down from 550 in 2002, when the state cracked down on the payday business with stricter regulations, according to the state Department of Financial Institutions.
Dozens of payday loan businesses operate virtually unregulated on the Internet.
Borrowers say the easy-to-obtain loans help out in a pinch.
Neil Fitzgerald, an Indianapolis tire shop supervisor, said his need of a Check 'n Go loan this month had less to do with the bad economy and more to do with being short of cash to buy a used car after his truck blew a head gasket.
He walked out of the payday shop near 75th Street and Shadeland Avenue last month after arranging a payment on his loan. "Everything has gotten backed up with bills," he said, explaining why he needed the quick loan to buy the car.
Source: Indystar.com
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