They're More Common Than McDonald's, But You Probably Shouldn't Go In
This financial trap is ruining the lives of millions.
Ollie Parham, who is now the Economic Chair of the NAACP in Alabama, was once a woman who couldn't pay her utility bills. To stay afloat, she took out a "payday loan," with little idea as to what she was getting into.
"My intention was to do it one time," Parham said. "But I felt myself realizing that I have to pay this money back in the next two weeks, so it just became a cycle. Payback, borrow back. Payback, borrow back. And since I didn't see any other income coming in, I felt like I could get the money so easily."
The payday loan Parham took out has become one of the most common methods of borrowing in the U.S., and like millions of other Americans, Parham fell into the financial traps created by payday lenders.
A payday loan is a short-term loan meant to provide fast cash for those in emergency need of financial aid for things like car repairs or medical bills. The deal is simple: get some quick capital and pay it back out of your next paycheck. But the reality is far more complex — and dangerous.
Payday outlets all over the country have been caught tricking their customers into re-borrowing, using false threats to pressure them into payments, and even structuring loans to automatically renew, drowning people in a tide of deepening debt.
The federal government recently forced ACE Cash Express, the second largest payday outlet in the country, to pay back $10 million to tens of thousands of borrowers for using "false threats of lawsuits and other illegal tactics to pressure customers with overdue loans to borrow more to pay them off," according to the Los Angeles Times.
ACE Cash Express commercial:
And yet, the number of payday lender outlets have more than tripled since 2000, from 7,000 to 22,000. They now permeate low-income neighborhoods and suburbs alike. They are so popular that a staggering one in 20 Americans have taken out a payday loan at some point in their lives.
In a withering report on "Last Week Tonight," John Oliver pointed out the absurdity of the fact that in America payday lender outlets now outnumber McDonald's restaurants. "I didn't know there was more of anything in the U.S. than McDonald's, including people and grains of sand," he quipped. "And the payday loan industry has only been around for just over 20 years. Even Ebola looks at that growth rate and thinks, 'that's impressive, you guys spread fast!'"
While Oliver's commentary is amusing, the reality of payday lending is anything but. 80 percent of borrowers are forced into renewing their loans at the next pay period, the majority of them being people with a median income lower than $23,000. Interest rates on these loans range anywhere from 65.35 percent to an astronomical 1,409.36 percent and are designed to trap clients in a long-term stranglehold of interest payments and fines.
The problem has gotten so bad that the federal government has stepped in. Three weeks ago, President Barack Obama delivered a speech at Lawson State Community College in Birmingham, Alabama on the dangers of payday lending. Ollie Parham introduced him.
"What they'll say is these loans help you deal with a one-time expense," Obama said. "In reality, most payday loans aren't taken out for one-time expenses, they are taken out to pay for previous loans."
"At first it seems like easy money, but the average borrower ends up spending about 200 days out of the year in debt," he added.
While payday lender outlets have exploded across the country, they have also managed to grow their industry online, where one third of all payday borrowers now get their loans. As Pew recently reported in their Payday Lending in America series, the online payday lender industry is the most common place for dangerous loans and misleading lending tactics. One in three online payday borrowers are fooled into taking out loans that are structured so that the borrower will be paying fees out of their paychecks, leaving most of the principal untouched. Threats, overdrafts on bank accounts, and the selling of personal information were all cited in Pew's extensive report as among the industry's practices.
"The payday loan industry has been devastating the financial lives of millions of people for decades," said James Zhang, a former private equity investor who is now a manager for the consumer finance website Nerdwallet. "And no one is talking about the investors and companies behind the predatory lending."
The investors Zhang is referring to are players in a perverse economic irony: The same private equity firm, JLL Partners, that owns ACE Cash Express, also manages pension funds for state governments — New York State Teachers' Retirement Fund and New Jersey State Pension — and the endowments of universities, including Harvard and Cornell. In other words, people putting money into colleges and teachers' pensions are helping fund an industry that is preying on the poor and financially uneducated.
Hearing so many dire warnings made me want to find out for myself, so I went over to ACE Cash Express' website to see if I could get a quote for a loan. When I tried to fill out the application online, I was prompted to enter my social security number, bank account and routing numbers along with my address just to see how much interest I'd have to pay. Erring on the side of caution, I decided to skip the online application and call in for the estimate.
The first representative I spoke to assured me that they wouldn't have my PINs or passwords and that I should feel comfortable handing over my bank information. He explained that after submitting the application, I could always go through the process of withdrawing it should the interest rate in the report be too high. This entails filling out an online form to stop the loan from automatically going through.
A second representative described interest on the loan as a "finance fee" of "about 30 dollars on every 100 dollars" in the state of Texas, where ACE Cash Express is most popular. I told the operator that I had heard some frightening stories about payday loans and asked if she had any advice. "The fees are a lot lower with payday loans compared to installment loans," she said. "If you're not looking for something that's going to be too overbearing, if you just need some money to get through the week, I'd advise a payday loan."
By all accounts, this is the tag line the $9-billion-dollar industry uses to sell people on high-interest, short-term loans.
The Rays Of Hope
Ollie Parham and many like her understand that the payday loan industry is at once a symptom of a growing wealth gap and an uneducated public, and that the best way to stop payday lending is to inform people, particularly in low-income areas, about the safest way to invest their money. During his visit to Birmingham, President Obama spoke to faith leaders, consumer advocates and civil rights activists asking them to talk to people in their communities about these predatory loan outlets.
Legislation that limits predatory lending and draconian interest rates is also key. In July of 2011, the Obama administration helped create the Consumer Financial Protection Bureau (CFPB), an agency designed to shield American citizens from predatory financial advisors; it was the CFPB that brought charges against ACE Cash Express. Last month, the CFPB introduced a proposal that would extend federal oversight on payday lenders, making it harder for them to trap customers in a whirlpool of bad debt.
"The proposal must be strengthened to close loopholes that would continue to allow dangerous loans that trap consumers in a lifetime of debt," Senator Sherrod Brown, the highest-ranking Democrat on the Senate Banking Committee, said in a statement to A Plus. "Hardworking families who play by the rules shouldn't be victimized by predatory products or lending tactics that harm our communities and our economy."
But congressional Republicans recently sought to undercut these efforts by slipping legislation into the National Defense Authorization Act that would block predatory lending protections for American veterans.
In the absence of a unified effort on the part of the government, several other organizations are picking up the slack. The Institute for Financial Literacy, MyMoney.gov and NerdWallet are all excellent places to find objective advice about how to invest your money or take out a loan. NerdWallet, in particular, has done extensive research into alternatives to payday loans and offers a number of helpful resources for those trying to decide how to handle their money.
Meanwhile, Obama is imploring state governments to join in the fight. As of now, 18 states and the District of Columbia have banned payday loans.
"He's determined to make sure at the federal level things are being done, but he knows you in your state need to do something," Parham said. "We can't drop the ball here and expect the government to do something."
UPDATE: In a press release, the U.S. House of Representatives Committee on Financial Services has called on Universities and retirement plans to divest from these lending services.