Payday loans can be a cycle of debt
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By: Cathy Mayfield
Minnesota Public Radio
St. Paul, Minn. - As the recession deepens and people on the economic margins struggle to pay rent or make car repairs, payday loans can offer quick help. However, borrowers can also find themselves caught in a vicious cycle of debt.
Today at the Capitol, lawmakers will consider two bills that would restrict payday lending. As part of our Youth Radio series, Cathy Mayfield of the University of Minnesota looks at quick cash in a bad economy.
Growing up in a middle-class family in Chicago with two working parents, we often found ourselves strapped for cash. For the past two years, my mother, Yolonda Mayfield, has been taking out payday loans. My dad and grandmother did not think it was such a great idea.
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"It came in handy for medical bills when the kids were sick."
"The holidays were coming up and I was a little short on cash," my mom remembered, "I tried to get it from a 401K, I couldn't get it, I tried to get it from my job, I couldn't get it. So I tried a payday loan."
The $300 she borrowed helped her through the holidays. I got a guitar that Christmas. My mom paid off the loan, but it was not her last. She is paying off another one right now.
My mother said this was about the fourth time she's taken out a payday loan.
My mom is not alone. Last year, Minnesotans took out 172,000 payday loans, most of them in the suburbs.
I went to a Pawn America Payday America store in Burnsville, Minnesota's largest payday lender. Inside, in an area off to the right, is a counter that looks like a bank. It was not a drab place at all. The lobby is vibrant with television screens touting Pawn America's financial services. Customers streamed in.
"It just helps out a lot because your paycheck -- you might have missed a few days of work -- and your paycheck ain't as big as you thought it was. And if you come here you can get a little bit of help and pay off your bills," said Angel, a customer who came in with a friend and two children.
"I don't come every week or anything," said Bob, another customer. "But whenever I get in a pinch, I'll borrow a little bit from here."
"It came in handy for medical bills when the kids were sick and everything for prescriptions, and when I lost my job," said Rachel, as she held on to her 4-year-old daughter.
These customers were all getting two-week loans of a few hundred dollars. They all could tell me exactly how much they've borrowed, and what they will owe two weeks from now. However, when I asked the interest rate they were paying, they were unsure.
"Um, I do, I forgot, I think it's like 3 percent," Angel said.
It is actually three times that, 9.5 percent for two weeks. That works out to be an annual percentage rate higher than 200 percent.
All the customers said payday loans helped them out of a tight spot and the terms are reasonable.
State Sen. Chuck Wiger disagrees.
"People are exploited and most end up in financial quicksand," Wiger said.
Wiger, DFL-Maplewood, wants to shut down payday lending by banning it entirely. Wiger said he did not write the bill to prohibit payday lending because his constituents complained about it.
"I was more motivated by a documentary I saw on public television which talked about exploitation of poor people, particularly people of color," Wiger said. "I wondered, does Minnesota allow this? I checked, I found out that yes, we do allow it."
Wiger sees a connection between payday lending and the giant mortgage crisis.
"Talking to constituents about the economic mess this country is in, the primary reason is the irresponsible lending practices," Wiger said. "We need to look at all aspects of lending, the issuance of credit. And here's a population that is exploited and that needs to be changed."
Fifteen states and the District of Columbia have banned payday loans. There are conflicting studies about whether bounced checks and bankruptcies rise when states cut off this source of credit.
Congress has also stepped in. In 2007, it capped payday loans to military families at 36 percent, and is now considering a nationwide cap.
In Minnesota, lawmakers are hearing another bill that would allow certain repeat customers to take advantage of easier terms so they can pay off their loans without having to borrow more.
The bill doesn't ban payday lending altogether, but Brad Rixmann, the CEO of Minnesota's Payday America, said it would put him out of business.
Rixmann began offering what the industry calls "small consumer loans" back in 2000. He's proud of his 13 Pawn America/Payday America stores and their reputation among consumers.
"They come back because they are satisfied. They believe that we give them a fair value," said Rixmann.
He defended his business and said payday lending works well in Minnesota. He blamed abuses in other less regulated states for giving the industry a bad name.
"I live here in the state, and I have to go to bed and feel good about myself at night. And if we charged 30 percent or 720 percent a year, I wouldn't be comfortable with that, either," said Rixmann.
If lawmakers put the hammer down on storefront lenders like Payday America, Rixmann pointed out that borrowers would suffer, too.
"Where are customers going to go? They are going to go to unregulated sources, be that the Internet, people on the street, maybe there is a black market," Rixmann said. "If the customers aren't provided the ability to get a loan in a regulated environment, they are going to find it someplace."
Increasingly, that place is on the Internet, where payday loan business is growing 10 to 15 percent a year.
Minnesota doesn't regulate online loans because it can't. Last year, the Department of Commerce tried to regulate payday lenders online but the state was sued and lost. A new bill at the Capitol would require online lenders to be licensed by the state.
But Minnesotans are already borrowing online, like Jeff Skrenes.
Skrenes worked as a mortgage originator. Like many people who get payday loans online, Skrenes is computer savvy, and comfortable entering personal data online.
"It was just so convenient because if you used them a lot, you became one of their preferred customers and then you didn't even need to send in any information," he said. "You just clicked a little box that said, 'Nothing has changed. My bank is still the same, My job is still the same, I want $500,' and you're good to go."
Skrenes and his wife soon found themselves owing $2,000 to five online lenders.
"The highest I remember seeing was 488 percent APR," said Skrenes.
The payments shot up to $800 a month. The marriage didn't survive the financial strain. Skrenes paid off his debt and swore off payday loans.
My mom hasn't, but she hasn't gotten into trouble, either financially, or with the family.
"I'm not thrilled about the interest rate," said my mom, "but you have to understand that you have to pay that money back."
It was her choice.
The Minnesota Senate Commerce committee will make its choice about payday loans later today.
