Payday loans - High demand, high interest

The payday loan industry walks the line between helping and taking advantage of people who live from paycheck to paycheck. Which side of that line the lending businesses are on depends on one's point of view.

Small-loan companies will give people money when perhaps nobody else will. When people run out of credit and have nowhere to turn, the payday lenders are sometimes the last place they can go to borrow a small amount of money.

On the other hand, these businesses make their money on others' poor financial situation. The state attorney general's office receives at least one complaint per day about payday loans.

The small-loan industry has developed nationwide notoriety for squeezing high fees and rates out of the people who can least afford it. Various state governments across the nation have put restrictions on the industry, effectively putting payday stores out of business in some states.

In Missouri, two bills have been introduced in the legislature that would put more restrictions on payday loan businesses. Both new bills have been introduced by House Democrats.

The demand for these loans appears high, particularly in Missouri. Since 1992, when the law didn't provide for small-loan operations, the number of payday loan stores in Missouri has increased from zero to 988.

"The growth has been explosive," said Steve Geary, a supervisor of consumer credit in the state's Division of Finance.

A Marble Hill woman leaving Check Please in Jackson after making a payment Friday afternoon said she uses the loans "quite a bit" to catch up on bills, repair her car and buy groceries.

"They're helpful to me," she said. "But you have to be smart about it like everything else."

Small-loan businesses charge interest which would amount to almost 400 percent if it were spread out over a year. It's an interest rate vendors say is necessary because of the high default rate associated with the business.

Current law allows lenders to charge interest of up to 75 percent for the term of the loan, which is limited to between 14 and 31 days. However, laws passed two years ago limited the number of "roll over" loans and thus the amount of money small-loan stores could accept before demanding full payment. This law prevents debtors from racking up thousands of dollars of debt.

How it works

According to Cape Girardeau InstaCash owner Jennifer Blackwell, the process generally works like this:

A person walks into a small-loan business and asks for a 14-day loan for, say, $200.

The creditor checks to make sure the applicant has a checking account, a recent pay stub and a photo ID. The creditor makes sure the checking account has had at least $230 in the checking account at least once during the 30-day statement.

The applicant writes a check for $230 -- or $15 per $100 of the loan -- and dates the check for 14 days later.

In 14 days, the applicant has the option of paying the loan in full or making a minimum payment, also called a "loan renewal." On a $200 loan, the minimum payment is $40. Of that amount, $30 goes for new finance charges, $10 to principal. In 2001, the state of Missouri passed a law that requires all small loans be paid off at the fifth renewal. Should the applicant pay only the minimum payment, he or she could pay as much as $309.50 for a $200 loan.

Blackwell said her customers often would qualify for credit at a bank but only need a few hundred dollars -- not the $2,000 many banks require to be borrowed. People borrow money for emergency trips, automobile sales tax, room decorations and Christmas presents among other things, she said.

She said her company uses several guidelines to ensure that a customer is not getting in too deep and is capable of repaying the loan.

"We as an industry know it is our responsibility to educate the consumer," she said. "We cannot allow them to get into more financial trouble. ... We are here to help people, not hurt them."

Bill would limit interest

A bill proposed by state Rep. Vicki Walker of Kansas City would prohibit repeated renewals and limit the interest after the first 30 days to not more than 1 1/2 times the maximum rate established for credit cards. That is an annual percentage rate of about 36 percent. Her bill would also give the attorney general's office the authority to file injunctions against payday loan institutions that break the law.

"There is a place for small loans, but I have a problem with them popping up in every corner, and I have a problem with them charging 300 to 400 percent interest over a year."

A bill proposed by state Rep. John Burnett, also of Kansas City, would limit the interest and other charges to a total of $15 per $100 of principal for the first 31 days of the loan and interest of not more than 3 percent per month thereafter. The bill repeals language that permits lenders to issue a new loan to pay off the original loan, which allows the lender once again to charge 75 percent interest.

Employees of payday loan businesses, some of whom spoke only on the condition of anonymity, said the 3 percent language would completely eliminate loan renewals and their customers' choices.

Burnett said he doesn't expect the 3 percent number to stick as the bill moves along. He has been promised a hearing on the matter at the committee level.

Walker said she has seen the number of payday loan stores increase in the Kansas City area. There are seven in one particular strip mall.

"If we can annoy the heck out of them, hopefully they'll stop," she said. "They go to marginal neighborhoods, and in these economic times it could be the push that sends a marginal neighborhood the wrong way."

Elwanda Seabaugh, a Jackson resident, has seen the growing trend of small-loan places in the area. She said she doesn't think the growth of the payday loan business is good for consumers.

"I think if you need to borrow money, you need to borrow from some place besides that," she said. "I know a lot of people don't think about the high interest rates. I don't like seeing payday loan places going up. There's one around every corner, and you see more of them all the time."

Increased lobbying

Walker's recent attempts at the state level to greatly restrict small-loan stores have been met with increased lobbying by the industry. Legislators came up with a middle ground which allowed five renewals before the debtor has to pay off the loan.

State Rep. Jason Crowell, R-Cape Girardeau, was on a committee that addressed this issue two years ago. At the time, he said, a compromise was reached, and the state decided to wait and see how the interest laws worked out.

"I think the payday loan industry has a clientele, and I think it's a business that people are free to use or free not to use," Crowell said. "I'd be more than willing to look at new legislation, but I don't know if those bills are a direction we need to go at this time."

Walker doesn't think either bill will make it into law this year.

"The banking and payday loan industry lobbyists are extremely strong," she said.

bmiller@semissourian.com

243-6635