The Big Squeeze

Thinking about taking out a payday loan? Think again, sucker.

She didn't know the loan would make her ill, make her cry, even make her think her husband would want a divorce. In the beginning, all Kristy knew was that a $300 payday loan would help pay for the vacation she and her husband, Michael, had planned in Eureka Springs, Arkansas.

Getting the extra money was simple. In October 2004, she clicked on a pop-up ad on her computer; the ad exclaimed, in bold, how quick and easy the loan application was, how fast the money would be delivered to her. All Kristy needed was a checking account (something all payday lenders ask of their clients), a pay stub and a copy of her bank statement. No worrying over a credit check, either. Quick Payday, the payday lender she used to finance her Arkansas trip, only required Kristy to grant access to her checking account. Once she did, she got a loan for $300. Two weeks later, Quick Payday would withdraw $360 from her account.

That was the plan, anyway. But at the end of two weeks, she didn't have the entire $360. She paid $60 in interest to extend the loan for 14 more days, meaning two weeks later, she would owe the loan's principal, the $300, plus another interest charge of $60.

Storefront payday lenders, like the ones shown here, offer money to people who wouldn't otherwise get it--but charge interest rates their critics call "usurious."
Mark Graham
Storefront payday lenders, like the ones shown here, offer money to people who wouldn't otherwise get it--but charge interest rates their critics call "usurious."
Mark Graham

It would be months before she realized how much that interest could add up. Viewed as an annual percentage rate, that $60 amounted to 730 percent interest, 595 points higher than what Texas law allowed for a $300, 14-day loan. Yet in this case, the loan was beyond the law of Texas--just as all payday loans are. It's the reason for Kristy's wrath, the reason she's now come forward with her story. (Kristy, a legal secretary at a prominent Dallas firm, asked that her last name be withheld.)

Quick Payday has its offices in Logan, Utah. Utah has no cap on payday loan interest. Quick Payday, then, can apply, with impunity, the lax standards of that state's usury laws to any other state because Quick Payday needs only to abide by the statutes of Utah, even when making loans outside it.

A similar business model is used by storefront payday lenders with offices across the nation. Three of the largest chains are based in the Dallas-Fort Worth area: ACE Cash Express Inc. of Irving; Cash America International Inc. of Fort Worth; and First Cash Financial Services Inc. of Arlington. All of these storefront payday lenders have partnerships with banks outside the state, often in Delaware, where usury laws are a joke. The bank partnership enables a storefront payday lender to charge, in Texas, the interest rate of the bank in Delaware. Why? Because the interest rate in Delaware can be exported across state lines. Even better for the storefront lender in Texas, there's not a damn thing a state regulator can do to stop the violation of Texas' usury laws, because Texas regulators have no jurisdiction over Delaware's interest rates.

Had Kristy known about the exported interest rates--the "loan sharking," as she calls it--she never would have asked for the money. Never would have put herself in a situation where she couldn't pay off her first loan, where she could only extend it for two more weeks and pay off the interest, the $60.

Kristy took out a second loan for $200 with a company called ICS Debit. But the debt trap continued. So Kristy took out a third loan on November 17 of last year--this one from another Internet lender, Preferred Cash, for $300, with $60 in interest on the loan and an expectation that it would be repaid in full in two weeks.

Only that didn't happen, either. And now Christmas was coming, and all she could do was pay interest on all these loans. She kept coming up short. She hadn't told Michael and didn't want to. Too embarrassed. Best, then, to keep up appearances. Buy as many presents as last Christmas. Buy as many groceries as last week. Act as if things were fine.

Things weren't fine, of course. The interest she'd paid on loans would soon equal the loan amounts themselves. Yet Kristy was still nowhere near paying the loans off. "It started snowballing," she says. Nothing worked. No formula. No dollar-scrimping. The only option, in the end, was to take out yet another payday loan.

This one would be for $1,000--and with it, she'd pay off all the principal amounts from all her smaller loans and all the interest that had festered and grown and made her sick with worry. But that loan, when she got it, was only for $800. The company kept $200 up front. And $800 wasn't enough to pay off the other loans.

The cycle continued. Four more loans totaling $2,100 in the next month and a half. In January, the loans and interest--that damn interest--consumed Kristy's checking account. Soon, she owed her bank $800. She turned to her mother, Helga, who helped, but by mid-February Kristy knew she'd need Michael's support. She worried he'd divorce her. She owed maybe $3,000, and they weren't rich; Michael worked as a car mechanic. But he didn't yell when she told him. "It got to the point where she was crying, she was ashamed," Michael says. "There was nothing that I could have said or done to make her feel any worse. It was done."

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Payday loans can turn into a big problem if you delay the repayment. The interest keeps piling up as time passes by. In order to avoid such situations, do an in-depth study of your repayment plan and terms of agreement before getting the loan. Otherwise you will get stuck under a large stack of debt and getting out will not be easy.