The Big Squeeze

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

Hagert says the bill doesn't prevent the industry from threatening a client to pay off outstanding debt. And it doesn't prevent the client from taking out a new loan with the lender in the face of those threats.

In any case, Flynn's bill died on a point of order in May, never making it out of the House.

"What you should do," says state Representative Burt Solomons of Carrollton, chair of the House Committee on Financial Institutions, "is go ask Congress why they aren't regulating [payday lenders]." Without Flynn's bill, he says, "you can only do so much on a state level."

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

The offices of U.S. Senators John Cornyn and Kay Bailey Hutchison did not return calls seeking comment on payday-lending legislation. Neither did the office of Congressman Pete Sessions, who represents Dallas. U.S. Senator Elizabeth Dole proposed an amendment July 25 that would severely limit the practice of payday lending to members of the military.

But that's as far as the regulation--proposed or otherwise--goes.

And none of it addresses Internet payday lending. Internet lenders are even more cavalier than their storefront counterparts. A November 2004 report by the Consumer Federation of America found some Internet lenders offering payday loans in all 50 states, though payday lending's illegal in 15. The CFA report says, "Lenders are hard to locate, identify or contact. Some are licensed in their home states, while others hide behind anonymous domain registrations or are located outside the United States." This makes government oversight next to impossible. Worse, some sites fail to disclose the information about fees and interest rates, though the federal Truth in Lending Act requires it, the report says.

Even a storefront payday lender doesn't approve. "This Internet thing, it's a huge problem," says Eric Norrington, vice president of communications for ACE Cash Express.

"But it's real easy to get into," says Michael, a schoolteacher from Fort Worth.

For Michael, it was at first a decision born of parental love. He took out a $200 Internet payday loan that helped him through Christmas 2002. He's a single parent, with a teenage son and daughter wanting things his teacher's salary couldn't pay for. When the solicitations came through his mailbox, the ones saying how easy an Internet loan would be, how quickly he'd have the money, Michael logged on and signed up.

He had never heard of a payday loan until he took one out. "At first, I didn't want to do it, because I didn't want to take out that much interest," he says. The loan carried $20 in interest for every $100 borrowed. "But I thought, things will be better after Christmas, and we'll just kind of take it as it comes. That was probably the big mistake."

The school district paid Michael once a month, but his payday loan came due after two weeks. So Michael paid down the interest and extended the loan until January, his next payday. In January, Michael paid the loan off, but it took "a big chunk" out of his paycheck. He didn't have enough money for his February expenses. He searched for a bank that would give him a small loan with a better interest rate but couldn't find one. Banks didn't do small loans, he discovered. Payday lenders did. Nearly every day, he'd open his mailbox and find another solicitation. After some hesitation, he took out another payday loan.

It went like that for a year. Michael would pay off one loan, find himself short for the next month's expenses, take out another loan, renew it, pay it off and find himself short on the next month's rent or car payment or something else. He'd try different Internet companies, but each left him scrambling. Then in December 2003 he found ACE Cash Express and its $15 of interest for every $100 loaned. Still an exorbitant rate, he thought, but it was also the best he'd seen of any payday lender. Maybe he'd have better luck with a storefront payday outfit.

He didn't. He took out three loans with ACE. The last was for $400.

All the while he researched the industry, finding consumer Web sites that explained "the cycle of debt." Yup, that's me, Michael thought. He came to the conclusion that "I hate payday companies" and vowed not to take out a fourth loan with ACE or with anyone else.

But it would take months before he could pay off ACE. The lender agreed to an incremental, monthly repayment schedule. Michael owed $200 in May 2003 when he got a call from an ACE representative. "She was real nasty," he said. She wanted him to pay the remaining balance. Michael couldn't. Well then, the representative said, expect a call from a collection agency in a week.

One week later, "Aaron Manning" of the "Bad Check Division" left a message on Michael's answering machine. "If I'm unsuccessful in contacting you," Manning said, "you put us in a position to look for alternative ways of contacting you."

Alarmed, Michael called him back. Manning said he was with the state of Texas' "Division of Hot Checks and Fraud." Manning said Michael could lose his teaching license if he didn't pay up. (Michael recorded the phone call.) Manning said Michael could face up to five years in prison. Manning said Michael "had two hours to come up with the entire balance or charges would be filed."

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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.