The Big Squeeze

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

On February 28, they paid off the loans, the interest, everything.

The final dollar amount? Perhaps it's best to think of it like this. In October, Kristy took out a $300 loan. In March, she'd paid off all her lenders but spent nearly $8,000 in the process.

Consumer advocates find stories like Kristy's all the time. The Dallas Observer spoke with two others. One of them is an elderly woman whose payday lender sought prosecution from the Dallas County District Attorney's Office. The other is a Fort Worth schoolteacher who took out payday loans for a year, three of them from ACE Cash Express of Irving. He calls payday lending "a debt trap" and had ACE's collection agencies threaten him with jail time for not repaying his debt, a practice that's illegal. Critics of the payday industry say lenders and the collection agencies they hire don't care about legalities. They care only about profits. As a result, there are hundreds of stories like the ones you'll read here. (Most of the others remain in the shadows. It's one thing to admit you had a problem with a payday lender, quite another to admit it to the media. It's for this reason that some of the people in this story are identified only by first names.)

Mark Graham
State Representative Dan Flynn of Van, in East Texas, 
proposed a bill this session that would have regulated 
how much interest payday lenders can charge in Texas.
State Representative Dan Flynn of Van, in East Texas, proposed a bill this session that would have regulated how much interest payday lenders can charge in Texas.

Critics say the payday lending industry is legalized loan sharking, preying on the downtrodden, its revenues predicated on a simple conceit: Payday borrowers will always have a tough time repaying the interest and the loan by the next paycheck. Indeed, the Center for Responsible Lending, a national community development organization, says the average payday client pays $800 to borrow $325.

The industry has a different story to tell. Banks typically don't issue small loans; it's too costly a practice. So payday lenders have taken their spots. Today, the industry's providing a service few other financial outlets do. With no credit checks, payday lenders extend money to people who otherwise wouldn't qualify. The interest rates are high because the borrowers usually have bad credit, so the loan is risky. As for the cycle of debt, the Community Financial Services Association of America, a trade group representing roughly two-thirds of the payday industry, says 60 percent of its customers either didn't renew their loans last year or renewed them between one and four times.

But renewing a loan four times is still a lot of money. Just ask Kristy. A $300 loan with interest of $60, extended four times, means a customer will pay $240 in interest on a $300 loan. "This particular industry has been known for a very long time as trying to disguise usury through sham transactions," says Jean Ann Fox, director of consumer protection for the Consumer Federation of America.

The industry says its need in society is reflected by its growth. There are 22,000 payday loan offices nationwide, up from 10,000 in 2001, according to industry literature. Payday lenders offer $40 billion in loans each year and collect $6 billion in finance charges from borrowers, according to a 2004 report by Stephens Incorporated, an industry analyst. In Texas, 55 payday companies operate 1,668 locations, says Leslie Pettijohn, Texas' consumer credit commissioner, who regulates the payday lending industry in the state.

Federal and state authorities are trying to keep up. In March, the Federal Deposit Insurance Corporation, the regulator of U.S. banks, said a bank that partners with a payday lender could not grant a client more than six loans a year. The FDIC believed some clients were simply taking out new loans to pay off others.

From there, the bad news continued for payday lenders. On June 10, the 11th Circuit Court of Appeals upheld a Georgia statute that said payday lenders must abide by the state's small loan law. The ruling could have Texas implications; next session, the Legislature could cite the 11th Circuit decision as evidence that payday lenders in Texas can no longer partner with out-of-state banks, can no longer import those banks' enormous interest rates.

But that argument--and any legislation that might come from it--could be a moot point. As of July, five of the payday industry's biggest players--Advance America, the nation's largest payday lender; EZCORP of Austin; and the three lenders from this area: ACE Cash Express Inc; Cash America International Inc; and First Cash Financial Services Inc. --all switched their business models. Four of the five lenders have already registered as credit services organizations. ACE Cash Express is considering the move.

A credit services organization (CSO) helps a person pay down her debt, but it can also make loans. If it makes loans, a CSO is considered a broker. A broker, in this case, is a person who initiates a loan but then finds another lender to carry it out and is paid handsomely for the work. In Texas, a broker can charge what it wants in fees for its service. In Texas, there is no cap on broker fees.

The industry says a switch to CSOs will allow customers continued access to the money they need. Jean Ann Fox and other critics say Internet payday lending is out of control, and the switch to a CSO model among the storefront lenders is another example of the industry exploiting clients and skirting the law.

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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.