Short-Term Loans Can Mean Lasting Trouble

(CBS)  In the current state of the economy, about 2,600 Americans a day file for bankruptcy. Others are turning to a financial quick fix called "payday loans." They've now grown into a $59 billion industry. But six states - Arkansas, Georgia, New Hampshire, North Carolina, Ohio and Oregon as well as the District of Columbia - have now effectively banned these loans, and CBS News chief investigative correspondent Armen Keteyian looks at why.

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Today there are 24,000 payday lending stores in America - more than Starbucks and McDonald's combined. They provide 19 million American households a quick way to make ends meet.

"Please borrow only what you feel comfortable paying back," says a video by the lending industry.

A typical customer takes out about eight payday loans a year - in essence, an advance on their paycheck - with rates as high as 20 percent, Keteyian reports.

For lower- and middle-class families with few financial options, such loans - even at that price - are a godsend.

But folks like Mary Bates now see something else - a short-term solution turned long-term trap.

"An endless cycle; a dead end," Bates said. "I would advise anyone not to."

For Bates it all began with a $400 payday loan - plus $70 interest - to fix her car. But after paying it off two weeks later, she couldn't afford to live on what was left.

So she took out another loan, starting a two-year cycle with a variety of payday lenders that ended up costing this single mother of two what she says was more than $1,500 in interest to essentially "float" a $400 loan.

"They are set for people like me, that live payday to payday. And then once you're in there, you can't get out," she said.

"Fifteen to 20 minutes, you can walk out with cash in hand," said Terrence Jent, one of eight former industry employees who spoke with CBS News.

A former regional manager, Jent says payday lenders train their workers to set hooks.

"Incentives that you offer to customers to get them to become repeat borrowers," Jent said.

Like "take out five loans, get the sixth one free." Or offering cash to managers of low-income buildings to refer desperate tenants.

And this document, obtained by CBS News reveals that among the targets for at least one payday lender are: "single-parent households with multiple children," who are "financially stressed."

"We had people all the time that would come in and take out a loan to pay their retainer fee on their lawyers to file bankruptcy," Jent said.

Looking at the industry's own Web site, we discovered that two of the customers profiled there actually declared bankruptcy - partly due to multiple loans from payday lenders.

"The service is very transparent," said Lyndsey Medsker, a spokesperson for the Community Financial Services Association. "There's no fine print; there's no hidden fees."

"Did you also know that two other people on your Web site have subsequently declared bankruptcy and they listed payday lenders as part of the reason that they were pushed over the edge?" Keteyian ask

"But I think you'd find that payday lenders would be a small percentage of whatever debt - people have when they do declare bankruptcy," Medsker said.

It's not the loan that - it's the interest on the loan that we're talking about.

"What happens without the option of taking on a payday loan? Does someone ... is it better off if they bounce a check? What would you recommend that these people do?" Medsker said.

Mary Bates knows full well what she will do the next time she's in a bind.

"I would do without electricity, water, whatever it would take until the next pay day - until I could pay," she said. "I would not do it."

It's a long-term lesson about instant cash Bates hopes others won't learn the hard way.

[BigJoeLeto]

The sad thing is that we're focusing so much attention on this issue, when there is a similar issue taking place. Right now in the United States, so many young people are deep in debt from college loans. With the economy being in such a poor state, it can be hard to find work and if it is available, there often is not all that much. Which means that the students can spend so much time just paying interest while the principal remains quite large.

A <a href="http://www.cashstore.com/">payday loan</a> is a good fix if it can be repaid quickly and responsibly. If it is being used as a solution for a long term financial difficulty, it may be worth rethinking.

[cdegolier]

Obama and the dems only want to end payday loan companies so that their banking buddies can collect more fees. Payday loan companies loan to people no one else will, banks are starting the practice, unregulated of course. The banks want a piece of the action and Obama wants to give it to them. What needs to done is regulate how many payday loans people can have at once, where I live their is no limit. So looking at it from a business stand point if someone has 10 paydays loans the chance of them paying them all off is zilch, the company loses. Obama isn't very bright, in an economy like this lets shut down thousands of store, causing millions more to lose their jobs, genius I tell ya.

The dems always say the are for the little guy, but have they actually talked to them? Nope.

[jib317]

nd_manda...you are wrong, if felt terrible for all the people that came to my store desperately trying to crawl out of debt but unable to because they got trapped in the payday loan cycle. It is not bad to take out a $100 pdl to avoid overdraft fees from the bank and return check fees from the place you wrote the check but too many people take out payday loans that are much larger than that...up to $1500 and the interest on a $1500 is over $300. That is not affordable for very many people. The government needs to cap the amount a person can borrow as wells as cap the interest rate. The government also needs to require all pdl co. to provide some sort of repayment plan, and not allow the customer to just &quot;rollover&quot; the fees which does not pay down the loan at all. Also each state needs to be required to have some system that does not allow a single person to have more than one payday loan at a time. Many people make the mistake of taking out a payday loan with multiple companies and then they cannot pay them back. Many payday loan companies do not access the customers ability to repay correctly. I was never required to ask the customer..ok so how much are your credit card payments, electricity payments, groceries... to see if the customer can in fact repay the amount they are borrowing. The government needs to mandate certain regulations that all pdl co. must follow all over the USA.

[camry92lady]

payday loans are very helpful to alot of people when they need some money to say fix their car or pay a bill..although some people do not use them responsible. payday loan companies do give you the option to work yourself out of it..you can knowck it down as little as 5 dollars each time or as much as you want. so there is ways to get yourself out of the debt. people need to ask what the options are when they take out the loans..people also need to borrow only what they need. people tend to borrow every bit of what they are approved for but if you dont need it dont borrow it.. some people can not get a loan anywhere else so they need payday loan companies..

thank you
nicole

[nd_manda]

They way you critize PDL JiB317 makes me wonder if you really ever CARED for the customers you helped while you worked for the industry. I have worked in a PDL company and never was I pushed to APPROVE APPROVE APPROVE. We are here to HELP RESPONSIBLE ADULTS. We offer tips for saving money they are called the CNG Check Points. No offense but when that material came I was glad, I TOOK one to plot my bills out. We never push people to take out the max amount. We tell them take only what you feel comfortable paying back. IF all states would have VERITEC people would not be able to run all over town and take out as much as they wanted and get themselves into trouble. BLAME YOU STATE LEGISLATORS BEFORE YOU BLAME THE PDL COMPANIES!!!!!! THANK GOD I LIVE IN NORTH DAKOTA AND THEY ARE SMART ENOUGH TO HAVE THE VERITEC SYSTEM!!!!

[jib317]

Or ask a military family...they can''t get payday loans due to the 38% interest cap the government put into effect last year.

[jib317]

Signature loans through a bank... most of the time those are not too bad with interest. some payday loan co. have those but their interest is much higher. Many banks offer them and you don''t always have to have good credit to get them.

[jannikuk]

Ok...so what do people with bad credit do for short term financial assistance?

[jib317]

If the people of the USA will allow the government to start caping interest rates the way the goverment did for the military and their families, then yes things would be better. I just don''t see that happening in all of those areas.

[jib317]

Well, unfreemarket... yes in the ideal world this would be true but there is no way the citzens of the free USA would allow such a thing to happen...people would then be complaining that the government is too overbearing. Once again I did not say payday loans should be banned, just regulated better. And yes all of those lenders do add to the problem, but show me where someone is paying 530% APR for mortgage/auto/credit card lenders. This is the the rate for many payday loans. Regulating this type of business will only help the economy. It will not cure it, but yes it will help it.