Payday loans gaining popularity
March 18, 2006 - Wilmington, Delaware
A few weeks ago, Larry Woody needed $200 fast and turned to an increasingly popular source: a payday lender.
He wrote a check for $234 -- post-dated by two weeks so the lender couldn't cash it until then -- and walked out with his $200. He had just paid the equivalent of 440 percent annual interest.
"My car was broken down, and I couldn't get any money," the Wilmington man said. "It was convenient for me. But I don't want to make a habit out of doing it."
Consumer advocates and government officials are concerned that too many people are using payday lenders to cover the gap between their stagnant incomes and rising expenses. The payday lending industry has grown from just a few hundred outlets a decade ago to more than 20,000 today. They lend an estimated $40 billion a year, usually in $200 to $500 increments.
"This market is incredibly dynamic," said Matt Fellowes, a researcher at the Brookings Institution, a nonprofit think tank in Washington, D.C.
Fellowes and other experts spoke at a forum Friday at the University of Delaware titled "The High Cost of a Low Income," which focused on the impact of payday lenders, check-cashing outlets and title-loan companies. Some of those businesses prey on unsuspecting consumers, and the high interest rates and fees charged by all of them can add up quickly, experts said.
Fellowes' study of payday lenders nationwide matches The News Journal's analysis of state and federal banking data, which showed that such financial institutions have become common in all kinds of Delaware neighborhoods.
In Delaware, 300 such businesses have taken their place alongside the 260 mainstream bank branches in middle-income neighborhoods and commercial districts throughout the state, data show. No longer confined to poor urban areas, they dot strip malls along Kirkwood Highway outside Wilmington, DuPont Highway through Dover and Del. 1 through Rehoboth Beach, with neon signs promising 10-minute approvals for borrowers with bad credit.
New Castle County is home to almost half of the state's alternative lenders. About 84 percent of them are in neighborhoods where the median household income is between $30,000 and $75,000.
"These aren't poor neighborhoods," Fellowes said.
Lenders fill a void
Most borrowers are middle-income workers with poor credit who need cash to cover an unexpected expense or loss of income, said Steven Schlein, spokesman for the Community Financial Services Association of America, a trade group.
"There are plenty of places that don't have many payday lenders, so there's plenty of room for more growth in this industry," Schlein said. "There's a huge need. There's no one else who will make low-amount, short-term loans."
That's exactly the problem, said Paul F. Calistro Jr., executive director of the nonprofit West End Neighborhood House in Wilmington. West End is working with Westminster Presbyterian Church to create a small, low-interest lending program to compete with payday lenders.
"Folks are able to charge 300 percent interest because there's no alternative out there," Calistro said. "There's no empathy for the people who use [payday loans] because people think they're making informed decisions. They're not."
In simple terms, an annual percentage rate represents the actual yearly cost of borrowing money, including any fees or additional charges. It allows borrowers to compare the terms of different loans.
Borrowers can't rely on state banking rules to make sure they get a good deal, said Gerard Kelly, deputy commissioner for consumer affairs with the Delaware Office of the State Bank Commissioner.
There is no limit to the interest rate Delaware lenders can charge. Each lending office must contain a copy of state banking laws, but there is no requirement that they be translated into simple terms.
"In Delaware, you've got to be an aggressive consumer," Kelly said. "The choices are too far and wide to go in with your blinders on."
'Like an addiction'
That's the same advice Larry Leonard gives. He offers payday loans at Lou's Jewelry and Pawn on Market Street in Wilmington. He charges $30 for a $100, one-month loan.
"That's the industry standard," Leonard said. "What people don't realize is the collection issue. If people can't pay you, they can't pay you. If people use them for short-term problems, they're OK."
Lonnie Edwards, of Wilmington, said he has bad credit, so payday loans from Lou's have been a part of his monthly routine for the past four years.
"It's something I say every month I'm not going to do, but then I do it," said Edwards, a part-time caseworker at Peoples Settlement Association, a nonprofit social services agency in Wilmington. "Usually I'm there the first week of the month, like clockwork."
Every month from his paycheck and small government pension, Edwards pays $735 for rent, $276 for child support and $366 for an education loan. To cover the rest of his bills, he borrows $500 from Lou's at a cost of $150 a month. That's the equivalent of 360 percent annual interest.
"It's almost like an addiction," Edwards said. "I just can't get ahead to the point where I don't have to rely on that payday loan anymore."
Raina Harper, a UD graduate student studying payday lenders, said the average loan fee in Delaware is $20 per $100 over two weeks, which equates to a 520 percent annual interest rate. The short repayment period is unreasonable and works to trap borrowers in a cycle of debt, she said.
"If you're already financially fragile, you need more than two weeks to recover from a hit to your budget," Harper said.
Diego Saltes, research director at the Community Financial Services Association, defended the high interest rates because they must cover the processing and overhead costs for a short-term loan. Also, it is unfair to consider the rate on an annual basis, he said.
"Most people don't hold the loan for a whole year," Saltes said.
Edwards said he pays off the loan each month. Some of the clients he sees at Peoples Settlement are getting payday loans from several sources, and some take out vehicle-title loans to cover their utility bills, he said. Title loans are riskier because borrowers can easily lose their vehicles if they miss a payment.
"What you're risking is too great because people need their cars to get to work," Edwards said. "They find themselves deeper in debt and they lose the car."
Education is key
That almost happened to Annie Fields of Bear last year.
Money trouble pushed her and her husband into bankruptcy, and they were about to lose their house, she said. She put up the title on her 2001 Chrysler PT Cruiser in exchange for an $1,800 loan.
"I needed some money to get caught up on some mortgage payments," Fields said. "I didn't want to do it because they take the title to your car, but I did it anyway."
She missed her payment by one day and a tow-truck driver showed up to repossess the car, she said. By the time it was over, Fields had shelled out more than $4,000 to repay her $1,800 loan.
The experts and officials at the UD forum agreed consumer education is key.
"Banning payday loans will hurt those it's intended to protect," Harper said. "It will drive the product underground and make it harder for people to get help when they need it."
The News Journal, Mike Chalmers, Staff Writer
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