Short-Term Loans Can Mean Lasting Trouble

Payday Advance Loans Seem Simple, But Can Lead To Endless Cycle Of Debt

(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.

[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 "rollover" 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.

[unfreemarket]

JiB317, asks why the government shouldn%u2019t regulate %u201Cone thing that will help some people not have to end up filing bankruptcy?%u201D To prevent bankruptcy, you need the government to cap costs on mortgage, car payments, credit cards, cable, cell phones, and gas. A short term infusion of cash from a payday loan may hold us over until the stimulus check arrives. So go after the real misers: mortgage/auto/credit card lenders, cable/cell phone providers, and GAS. If you end payday, only utility restart fees and bounced check fees remain. If payday goes, people will bounce even more checks, and bankruptcy rates will stay the same. The big banks would love that! Blaming payday lenders for bankruptcies, seems like blaming chemotherapy for cancer deaths. The bills that come first are the problem leading people to payday stores.Payday loans can''t always solve bigger problems, like chemo can''t always cure cancer. The Government should send more rebate checks, provide stockpiled gas, and pass laws to bring all of our costs down. If the Government would limit the charges on car payments, credit cards, cable, cell phones, and GAS, just like payday loan limits, then we could all keep buying anything we want, and not get debt collection calls. All costs would be lower, and we would have some extra money in our pockets. Once the Government sends more cash, and limits costs on everything, life will be perfect!

[jib317]

People need Financial counseling, more than they need PDLs. If they could learn how to save money, and spend wisely, they may not get themselves into the bind they are in that pushes them into payday loans. You can''t live outside you financial means. This is a very materialist society, but knowledge of better budgeting can help. and no not everyone will listen to good advise and they will be be stupid with their money and rack up the bills and then where do they turn to...the government to file bankruptcy! So why shouldn''t the government regulate one thing that will help some people not have to end up filing bankruptcy.

[jib317]

unfreemarket... if that is your situation then yes the payday loan will be a temp. fix, but when it comes time to repay the payday loan and a million other things come up and you can''t pay it off, you could end up in a cycle of just paying the interest, which does not pay down the loan...it just postpones the pay off. And I did not say that pdls should be outlawed, just regulated better.

[unfreemarket]

I am totally strapped for cash. My satellite dish and 2007 mustang were repossessed, my iphone was shut off, my McMansion is in foreclosure, and now the utility company wants to turn off my lights. My kids can''t even afford to eat at McDonalds 6 days a week like we used to do. None of them even checked if I could really afford them, no one evaluated whether I could afford to eat out every night. No one evaluated whether I could afford the Mustang or the Iphone or the Dish or the McDonalds. We need some price limits across the board on these things, if these things were cheaper, I wouldn''t be in this mess. Those companies are just out there to gouge poor old me. I hope Katie Couric, Nancy Pelosi, and JiB317 can cap all these fees, or impose a database at all resteraunts, phone sellers, dish providers, and auto finance companies, so these companies can check for me, whether I can really afford their services. Someone has to stop me from getting things I can''t afford, and I sure hope that someone is the government, cause I can''t trust me.

[jib317]

People need Financial counseling, more than they need PDLs. If they could learn how to save money, and spend wisely, they may not get themselves into the bind they are in that pushes them into payday loans.

[unfreemarket]

JiB317, sorry about the confusion. I think we both agree that everything expensive should be outlawed, see my earlier post, we are allies in this thing. Basically, I''m up to my ears in debt back home, and the power company is going to cut off the lights if I don''t pay them my $150 bill, which will be two months behind by tomorrow. I''ve never had a payday loan, or bounced a check or had my utilities turned off, so I''m a bit nervous, so are my wife and kids - please help. My cards are all maxed out, my credit is not super, and I have no cash. I called my bank, and the teller says that each bounced check will cost me $35 and they will cancel my service, no matter how much I write the check for. My utility Company says that since I am two months behind, I can''t get another extension. Plus if they turn it off, it''ll cost me the $150 I owe, plus an extra $100 restart fee (so $250). A nearby credit union wants me to pay a $40 membership fee up front, then will only give me a $100 loan, and they take 5% of the $100 they give me, and put it into a savings account I don''t even want. A payday lender will give me the $150 and have me pay back $173.50 in two weeks. I know I need the money quick, and have shaky credit, and no cash, but can you send me the money, or tell me what the best choice is - I can''t really decide between these options?

[jib317]

mbirdsong82...not all states have the extened payment plan...and I tried to get people to drop their loan down by $50-$100 each time, they did not have it to spare. The idea of a payday loan is good don''t get me wrong, but it is too easy for people to get into more financial trouble once they take these out. Yes there are some customer that will use payday loans for what they were intended for, but the fact is that too many people use them unresponsibily and therefore the government needs to do something to regulate the payday loans a little more, because some state governments are not doing enough. And pdls are not the only problem UNFREEMARKET but they are part of it. Im not saying pdls should be outlawed...just regulated better. Every state needs to have extened payment plans and other ways for people to get these thing paid off in a resonable amount of time.

[jib317]

Yes, PDLWORKER they do have budgeting tips and they are...
#1- Return your movie rentals on time
#2-ATMs charge fees for withdraws, do as few of them as possible
#3- Pay your credit cards on time.
These are good tips, however, how much money can people really save with this. If you don''t have the money to pay your credit card bills on time because you have to pay your payday loan on time (or else they deposit your checks and for many overdraw the account)the tips will not help that much.
HERE IS A HELPFUL TIP WITH PAYDAY LOANS...Pay them off and never get another one.

[unfreemarket]

JiB317, I agree, it is outrageous how much people pay for instant cash. The other day I had less than $100 in my wallet and about $25 in my bank account and knew I was in trouble, and decided to get out of town. I chose to run down to an ATM (embarrassed to withdraw from my own bank), and the ATM cost $3.50 to take out $20, in one day. Talk about shylocking! If you annualize that cost, the APR is 1,277%. Anyway, after getting ripped off by the ATM, I then chose to take a 10 minute, 10 mile taxi cab ride to Midway Airport and it cost me $22. Next I took a 1,173 mile flight on Southwest to Tampa for $69. So the cabby charged me almost $2.20 per mile (annualized cost of 803%), but the government regulated (thankfully) airline only charged me $0.04 per mile (annual cost of only 14.6 %). When I got to Tampa, I walked right past a drinking fountain, and bought a Zephyrhills bottled water for $1.50. The cabby and the water company didn''t even evaluate my ability to repay, they just served me right up, leaving me destitute. Now, I''m trapped at an Internet Cafe in Tampa with no money. Please, call the government to hurry and save me from mysel JiB317, where are you, please rescue me? I hope you can apply your efforts to outlaw all of these profitable businesses, because I can''t trust myself or these small business owners with my money.

[mbirdsong82]

people are allways talking bad about the PDL industry, how they are the bad ones putting america into debt by charging outrages fee''s. but we are not intended for people to get a loan and keep it. your short on cash, and need a hundered bucks untill payday, i''ll give you a hundred bucks, just give me back a hundred and fifteen bucks when you get paid. that''s not that outrages, a couple of weeks ago i overdrafted my bank account by $1.50 for ONE day. you know what that cost me???? $35. WHAT IS THE APR ON THAT??? These people that keep paying off and re-barrowing the same amount have options available to them on getting it payed off, if they choose to use them. They have the Extended payment plan or, they can drop their loan down by $50 or $100 each time they re-borrow, but they choose not to, which is blamed on the industry. There are many of my customers that use payday loan''s how there supposed to be used, and are thankful that we are able to serve them. but people that don''t use us correctly get all up in arms and get the government, and news stations against us. You want to complain b/c your car breaks down and you had to get a pdl to fix your car, b/c you had no other options... let me ask you this, where would you be if you didn''t have that pdl company to loan you the money to get your car fixed??? car-less??? job-less??? home-less??? well, weather you appriciate us or not.

[pdlworker]

JiB317: I now understand why you''re no longer an employee of CNG considering your "opinion" of the "average person''s" level of intelligence. Could you read people''s minds when they walked into your store as well as you claim to be able to read their minds now?

I happen to agree partially with your earlier post about the states that do NOT currently place regulations on payday loans. I agree in those states it is too easy for those who are already irresponsible with their money to go further into debt when they do not put a cap on the number or amount of loans taken within the state, however, that is STILL and ultimately the consumer''s choice. Nothing is hidden or mis-represented to them at any point before, during or after the transaction.

If everyone could cry "foul" and get results like this news broadcast every time they over-spent or over-borrowed, there would be NO credit card companies or mortgage companies left on the planet.

PS - if you were still with CNG then perhaps you would know that the company DOES offer budgeting tips and advice for helping consumers to save money.