With gaudy neon signs and hand-lettered posters promising money that seems too quick and easy to be true, payday loan outfits have sprung up like mushrooms on corners and in strip malls in low-income neighborhoods in the United States over the last few years. While payday lenders were relatively rare just a decade ago, today an estimated 8,000 to 10,000 ply their trade around the country, recording a profit of over $9 billion a year.

Payday loans are supposed to be quick, relatively small (average $200 to $300) infusions of cash for emergencies such as car repairs or medical bills. The loans are usually payable in two weeks, presumably after the borrower’s next paycheck, and usually at an interest rate of around 15 to 20 percent over the two-week period. Come payday, the majority of borrowers are unable to repay the loan, so it is refinanced again at an additional 20 percent. This process, called a “rollover,” is often repeated many times before the borrower is finally able to pay back the loan — or declares bankruptcy. Over a year-long period, that means a borrower may pay as much as 2,000 percent in interest — $4,000 on a $200 loan.

For those living paycheck to paycheck, with little or no ability to secure credit from banks for loans large or small, payday loans may appear the only alternative for quick cash, irrespective of the interest rate. The lenders are able to reap a bonanza on the borrower’s misery, so it is no surprise that payday loan operations seem to multiply by the day. Most of the time, these outfits also offer other services, which can also include high service fees, such as check cashing, notary public services, license plate distribution and money orders. Most also offer high interest loans on car titles, where defaulting borrowers lose their car.

“It appears not every company is reporting missed sales expectations, slashed payrolls and poor earnings,” trumpets a recent newsletter put out by the payday consulting firm Affordable Payday Consulting. “As all of us are aware, our industry is recording record growth throughout the U.S. and in several foreign countries! Here is a company based in Texas with pawnshops, payday loan stores, and more, doing very well, thank you!”

The company is First Cash Financial Services, Inc. It reported a 54 percent rise in profits in the first six months of 2001.

“Payday loans are really a new phenomena,” says Rob Dixon of the Coalition for Consumer Rights, a national non-profit. “When the usury caps were lifted during periods of inflation in the ‘80s, the payday lending people saw a loophole and they crawled in. The growth since 1997 has been exponential.”

Industry spokespeople and business owners tend to give the impression that payday loan operations are “mom and pop” businesses, and many of them are. Many have a fly-by-night air. Of about 20 Chicago area payday operations listed in a current phone book, for example, many have already changed names or have disconnected numbers, and most refuse to give out the number for corporate headquarters. But increasingly, these operations are run by large corporations with branches in many cities and states. And large banks, which have traditionally avoided any association with payday lenders because of their seedy reputations, are finding payday loan operations’ profitability hard to resist. These banks, which don’t offer small short-term loans as part of their services, have been increasingly partnering with payday loan companies.

“That is the deeper story,” says Dixon. “They don’t want you to hear about it, but it’s happening. Some are much more blatant than others.” For example, Eagle National Bank in Philadelphia funds, processes and profits from the loans obtained by Dollar Financial Group, a payday loan operation that has over 200 locations in 15 states.

“We provide the loans and they find the customers,” says Eagle President Murray Gorson, noting that this partnership has been going on for six years.

“We wouldn’t do this if it wasn’t profitable. A few years ago there were only a couple banks doing this, but now more and more are. I keep hearing from national banks who want to get into this.”

Rolling Over Consumers
Payday lenders say they provide a valuable service.

Rick Lyke, spokesman of the New Jersey-based FiSCA (Financial Service Centers of America), the national industry group for check cashers, payday lenders and other storefront financial services, says consumers are happy with payday loans.

He points to a May study by Georgetown University Professor Gregory Elliehausen, which found that 94 percent of payday borrowers report having other financial options but choose payday loans instead, and that 92 percent of customers had favorable attitudes toward the experience.

“Lots of critics try to portray our customers as financially illiterate, but we think it’s the opposite,” says Lyke. “People choose to come here because it’s a more convenient location, it’s open late, the staff are friendly and might speak their native tongue and they have considered other options and found that this is the best one for their needs.”

Gorson adds that with interest rates in the 20 percent range, payday loans can cost less than the charge for bouncing a check or not meeting a minimum payment on a credit card.

“Payday loans are designed to be used in emergencies with only one extension,” says Gorson, adding that Dollar tries to keep people from refinancing their loan more than four times or from taking out more than one loan. “There are some operators out there who try to extend the loan as much as possible, but for the vast majority of customers they get the loan and repay it with only one extension.”

While Gorson, Lyke and other industry leaders say the majority of payday lenders avoid repeated rollovers and provide a positive financial service for customers, consumer groups say that good experiences with payday loans are outweighed by disastrous ones.

A national study by the Chicago-based Woodstock Institute shows that “despite industry claims to the contrary, the average payday loan is rolled over 13 times” in six months.

“This has had a devastating effect on many consumers,” says Marva Williams, vice president of the Woodstock Institute. “Even though you’re starting with a small amount of money, after six months you’re talking about a large amount of money that the person has to pay without even paying the principal back.”

The Regulatory Challenge
Payday loans are regulated by states through usury laws that limit payday lending and legislation or regulations that specifically curb payday lending. Nineteen states, including New York and Pennsylvania, ban payday lending and 21 impose interest rate (APR) ceilings.

Regulatory legislation went into effect in Illinois in August after an extended battle between industry leaders and consumer advocates. The rules limit payday loan amounts to $400 and car title loans to $2,000; limit rollovers to two times, and only when the principal is reduced by 20 percent; and initiate a 15-day cooling off period between loans. The rules went into effect only after extended delays required by the state legislature.

But payday outfits are able to circumvent existing regulations by locating in unregulated jurisdictions and making loans by phone or Internet. Consumers can find a host of companies willing to offer fast money by doing an Internet search, and the companies, which are often located out of the country, wire the money into their bank accounts. As with most Internet-based businesses, the government has scant ability to regulate.

“Pennsylvania didn’t help its citizens at all with [its] regulations,” says Jerry Ayles, founder and owner of Affordable Pay Day Consulting, which does consulting for other payday lenders.

“It just forced them to do business on the Internet. You could have someone sitting in the Bahamas with their laptop making payday loans to people in Texas. That is definitely growing already. Costa Rica is very popular. And there you also have the privacy issue. People are giving these companies all their personal information, including their employer and their personal references. Then that information is out there for anyone to use.”

Many industry leaders have now joined consumer advocates in calling for federal legislation to regulate payday lenders.

“Without a doubt there are lenders out there who are abusing people,” says Ayles. “That’s why we need some legislation from the feds. This has to be made a win-win process.”

Illinois Congressman Bobby Rush, among others, has drafted legislation to combat payday lending on a federal level, but the legislation has not gained much steam.

But industry and consumer support for regulation in general rarely translates into agreement on the terms of legislation.

Industry groups typically advocate much weaker legislation, which frequently includes loopholes that enable lenders to avoid restrictions. For example, rules limiting rollovers may be circumvented by disguising a rollover as a new loan, especially if there is no mandated cooling off period between loans.

Consumer groups usually find themselves at a decided disadvantage in legislative fights. A state senate bill in California that would have placed moderate limits on the industry was defeated after payday lenders spent $528,000 in lobbying and donations, according to the Los Angeles Times.

Race and Lending
Industry representatives contend that payday lenders serve communities, particularly in low-income and minority neighborhoods, that are neglected by banks and other financial institutions.

“We have really good relationships with people in minority communities, where banks aren’t offering services,” says Lyke, noting that NAACP head Kwesi Mfume is slated to be the keynote speaker at FiSCA’s national conference in San Diego this fall.

Industry representatives also contend that payday loan customers have higher incomes and higher education levels than most people expect, and that the majority of them pay off their loans without excessive rollovers. Over half of payday loan customers make between $25,000 and $50,000 a year, Georgetown’s Ellihausen found in his study, and three quarters have a high school diploma.

Critics counter that poor working people, disproportionately people of color, are the primary users of payday loans. The Woodstock study found that 19 percent of payday loan customers make less than $15,000 a year, and another 38 percent make between $15,000 and $25,000. The Woodstock study also says that borrowers in predominantly minority neighborhoods had an average of 13.8 rollovers, 37 percent higher than in predominantly white neighborhoods.

One thing consumer advocates and payday lenders agree on is the fact that the industry is likely to continue its rapid growth.

“This is like raging bulls,” says Ayles. “No one is going to be able to stop this.”

The Woodstock Institute’s report notes that debt is steadily increasing while personal savings are decreasing for low-income households. Poor households possess more credit cards than ever before, the report says, and 40 percent of households in 1995 had less than $1,000 in liquid assets, a figure that is also worsening. This spiral of more debt and less cash makes payday loans more attractive than ever.

The Credit Union Option
One alternative to payday lending is localized credit unions that offer members short term loans at affordable interest rates.

The Woodstock Institute study examined a number of viable credit unions around the country, including the ASI Federal Credit Union in Louisiana and the Faith Community United Credit Union in Cleveland. With these credit unions, members have direct deposit of their paychecks, and, after a certain number of months they are able to access credit at affordable annual interest rates.

At ASI, for example, members can get up to $500 on credit with an annual interest rate of only 18 percent. Members also have access to free financial counseling, a free 10 minute phone card and travelers checks, free checking and ATM usage and 25 cent money orders. The credit union runs at a profit and has been around since 1961 with 56,913 members, proving that offering affordable small loans and other services to moderate-income people is feasible.

Credit unions and other programs that serve and empower low-income people are vital, says the Woodstock Institute’s Marva Williams, to fight the exploitation of the poor by payday lenders and others.

But she emphasizes that it is poverty that makes such exploitative lending possible to begin with. “The thing we can’t forget here is that what we’re really talking about is plain old poverty,” says Williams. “The fact is that in our economy too many people just don’t have enough money to live on.”

Kari Lydersen is a reporter at the Wahington Post Midwest Bureau and associate editor of StreetWise, a Chicago-based newspaper.