October 2001 - VOLUME 22 - NUMBER 10
Corporations and the U.S. Poor
By Kari Lydersen
Payday Lenders Target the Working Poor
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
borrowers 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 borrowers 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
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
dont 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 dont
want you to hear about it, but its 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 wouldnt do this if it wasnt 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
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 its the opposite, says Lyke. People choose
to come here because its a more convenient location, its 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
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 youre starting with a small amount of money, after six months
youre talking about a large amount of money that the person has
to pay without even paying the principal back.
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 didnt 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. Thats 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
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
We have really good relationships with people in minority communities,
where banks arent offering services, says Lyke, noting that
NAACP head Kwesi Mfume is slated to be the keynote speaker at FiSCAs
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, Georgetowns 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
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 Institutes 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 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
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
Credit unions and other programs that serve and empower low-income people
are vital, says the Woodstock Institutes 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 cant forget here is that what were really talking about is plain old poverty, says Williams. The fact is that in our economy too many people just dont have enough money to live on.