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VOL. 35 | NO. 33 | Friday, August 19, 2011

Payday loans: Taking the good with the bad

By Colleen Creamer

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Kelly Newell was out of cash. The Joelton resident, who has an in-home transcription business, found herself a little short and decided to go into Check into Cash for a $200 payday loan, the legal limit at the time.

Six months later she repaid the $200, along with $360 in “fees” that had mounted during that period.

Today, thanks to the Tennessee legislature, Newell and others can borrow up to $500 from a single lender. For some, the new cap is a good thing. Newellhowever, says she believes it will simply perpetuate the “debt cycle.”

“I don’t think the limit matters,” Newell says. “Some people are going to borrow what they’ll allow because they think something is going to magically come along, and they won’t get into all that debt.”

Fifteen states have banned payday loans. Many other states, including Tennessee, have capped fee rates, according to the Consumer Federation of America.

Previously, the fee was capped at $30 – $15 per $100 – because the principal was capped at $200. Now payday loan businesses can charge no more than $75. Still, there is no limit to how long a lender can simply require a fee instead of the whole amount.

Newell continued, as many do, to just pay the $30 fee every two weeks for six months and not the $200 she had to eventually borrow from her family, piling up an additional $360 in debt.

The $42 billion-a-year industry outnumbers Starbucks and Burger King in outlets across the country. According to one study, the explosion happened a little more than 10 years ago when the number of payday loan offices increased nationwide from less than 500 in the early 90’s to approximately 12,000 in 2002.

The “pay-day loan bill” that upped the limit in Tennessee this year was sponsored by Sen. Bill Ketron (R-Murfreesboro). The bill also requires a presence in Tennessee for online services and fixes the rate at $15 per $100 loaned.

“It took off in the 90s, and it has exploded not only in Nashville but across the country,” says Kathleen Calligan of the Better Business Bureau of Middle Tennessee. “Unfortunately, so many states have pretty much wrapped their arms around this industry and have given them special privileges and considerations. They don’t have to abide by the rules that other financial institutions have to.”

Loan shops such as Check into Cash or Tennessee Quick Cash are aimed at those who have no or poor credit, the young, the poor and those who live on or near military bases. The industry thrives during bad economic conditions and because banks rarely offer small loans, for years a service consumers relied on for money to tide them over in hard times, Calligan says.

Cleveland, Tenn.-based Check into Cash, for example, is the third largest payday lender in the country. Founded in 1993, it operates more than 1,100 branch locations in 30 states and was founded by W. Allan Jones.

“The traditional banking relationships were pretty much built on the little, short-term, 90-day personal loan,” Calligan says. “They helped a lot of people even as late as the 70s and probably even in the early 80s. Banks moved away from them when credit became such a commodity. It was a relationship builder, and it certainly was an established understanding that character repaid loans not just a signature.”

Zach Blair, an aide to Ketron, says Ketron introduced the bill to help consumers better manage loans, particularly borrowers who use multiple services.

“A lot of the times consumers were visiting several locations, and some companies were allowing two separate loans, so they were having to pay more,” Blair says.

Paige Skiba, an assistant professor of law at Vanderbilt University who does research in economics and micro-banking, believes payday loan shops are good for those who have an understanding of the real cost of not paying the loan back in good time.

“I am not a person who thinks banning payday loans is a good thing,” Skiba says. “Traditionally, even though they are extremely expensive, 500 percent APR or more, payday loans can actually be a good thing for people when used the right way.

“Economists think of credit as good thing. You borrow money in good times to make it through bad times, but it’s true that payday lenders make their money by getting people to renew their loans a lot of times.”

Skiba, who has researched payday loan limits and their outcomes, disagrees with Newell that the higher amount allowed will get people into more trouble.

“I think that raising the limit actually may be a good thing for borrowers,” Skiba says. “I’ve done research on this, and it shows that, when people are allowed to borrow larger amounts, it actually helps them to repay the loan rather than renewing it a bunch of times and then eventually defaulting.”

The high interest rates, according to the industry, are necessary because of high default rates. Normal interest rates could not effectively apply as they would not cover administrative costs along with those defaults.

Still, it’s the rate of interest that bothered some Tennessee Democrats during discussions about Ketron’s bill, and the language. The wording of the legislation mandates that fees not be called “interest.”

“Any time you charge for the use of money for a period of time, it’s interest, no matter what kind of name you put on it,” says Sen. Douglas Henry, who represents the West Nashville’s 21st Senate District and opposed the bill.

“I don’t mind the raise to $500. It’s the interest rate that worries me,” Henry says. “It’s excessive.”

Getting a payday loan is becoming increasingly easy. When a consumer does an Internet search for “payday loans Nashville,” a one-stop shopping website locating a Payday lender in a given zip code comes up. For online applications, consumers are immediately directed to put in not only their social security number but their bank’s routing number and account number.

Blair says this was the reason for requiring those companies to have a physical presence in the state, to make those institutions accountable in case of fraud.

And even though Skiba says she believes raising the limit to $500 is a good thing, she does offer some thoughts on human nature.

“No one goes into a payday loan shop thinking that they will renew the loan five times,” she says. “They think it will really be a one-time thing. They wind up just paying the interest over and over.”

Newell agrees.

“I should have just let them cash that first check and none of this would have happened. It was an expensive lesson.”

Because the quick-cash industry is under the umbrella with all financial institutions in Davidson County, there is no data on how many there are in Nashville. Figures from the Tennessee Department of Financial Institutions show numbers of them dropping steadily from 2006 likely due to consolidation.

Calligan says she didn’t’ know how many there were in Nashville.

“How many corners are there?”

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