Pay Day Loans Come at a High Price

by Joanna

I am sure everyone has seen advertisements for "pay day loans". They are advertised as being available to anyone who has a bank account and a source of income, regardless of credit. They are touted as the solution for making ends meet when you come up just a little bit short on paying your bills.

Of course, those ads never mention that pay day loan companies KNOW that they can prey on the poor and get them caught up in a never ending cycle, in which they are forced to take out loan after loan at exorbitant interest rates.

Pay day loan companies often specifically target the elderly and disabled, individuals who rely on Social Security benefits. These loan companies know that this is a very lucrative market for their loans. After all, an individual on Social Security has a guaranteed source of income, so the loan company knows they will be able to receive some sort of payment. AND, the income of people on social security is low enough that they are often forced to take out multiple loans, one after another.

But some industry critics say fixed-income borrowers are not only more reliable, they are also more lucrative. Often elderly or disabled, they are typically dependent on smaller fixed incomes and are rarely able to pay off their loans quickly. "It's not like they can work more hours," says David Rothstein, an analyst at Policy Matters Ohio, an economic research group in Cleveland. "They're trapped."

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Same pay day loan companies convince the elderly and disabled people who take out a loan to turn over their social security benefits to the company, and then provide them with a small allowance from each check. They specifically target individuals who are under educated, elderly, perhaps confused, and convince them that a small loan is the solution to their problems.

In November 2002, when Melvin Bevels was short of money for groceries and rent, the elderly man visited a Small Loans store in Sylacauga, Ala., and borrowed money -- he thinks it was $200. Small Loans is part of a sprawling network of more than a hundred lenders in four states, including Georgia, Florida and Louisiana, owned by Money Tree Inc., a closely held Bainbridge, Ga., firm.

Mr. Bevels, who can't read, says a clerk helped him fill out papers that instructed Social Security to send Mr. Bevels's $565 monthly benefits to an account at an out-of-state bank, which transferred the money back to Small Loans or its parent, usually within a day. As is often the case, Mr. Bevels's bank earned no interest and didn't come with either ATM cards or checks.

Every month for nearly four years, Mr. Bevels, who is known around town as "Buckwheat" because of his thatch of yellow-white hair, rode his motorized mobility scooter to Small Loans to pick up his "allowance," which was sometimes as little as $180 a month, he says.

In a written statement, Money Tree's general counsel, Natasha Wood, declined to comment on Mr. Bevels's case but said: "Anyone who sets up a direct deposit arrangement with Small Loans Inc. does so completely voluntarily."

Mr. Bevels, who believes he's 80 but isn't sure, quickly lost control of his finances. When his utilities were shut off, a neighbor gave Mr. Bevels water in a plastic jug and ran an extension cord to Mr. Bevels's trailer a few hours a day to power his nebulizer, which delivers aerosol medication to people with chronic lung conditions. Mr. Bevels was facing eviction when his trailer burned down, leaving him homeless.

A county social worker arranged for Mr. Bevels to move to public housing and got his Social Security benefits redirected to a local bank. When Small Loans sued Mr. Bevels for repayment in small-claims court in Talladega County, Ala., a legal-aid attorney headed to court. The judge threw out the case when the lender failed to appear with documentation for the loan.

"It just isn't fair, what they do to old people," says Mr. Bevels, crying quietly. "It isn't right."

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The pay day loan companies charge an interest rate that amounts to highway robbery. They are typically exempt from state usury laws, which put caps on the amount of interest that can be charged on a loan (usually about 12%) Pay day loans typically charge 10-15% interest on a 15 day loan, which works out to over 400% per year. And most people who rely on pay day loans are repeat customers.

Customers rarely borrow once. One in four borrowers took out loans between 10 and 19 times a year, according to a recent survey by the Department of Financial Institutions, the agency that regulates the state's more than 600 payday outlets.

The average borrower with 11 loans a year pays $600 in fees on a $300 loan, a 2004 report in the Yale Journal of Regulation noted.

The industry says its fees are no higher than fees on bounced checks or overdraft protection.

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Pay Day loan companies often do business in poor, urban communities. Although they claim that they do not target any specific groups, researchers have said that claim is not supported by research. Instead a pattern of racial targeting has been shown.

In Washington, there are a disproportionate number of payday shops in areas with higher percentages of black people, according to a statistical analysis conducted for the P-I by a University of Washington researcher.

Areas with the highest percentage of blacks had twice the concentration of payday stores as the rest of the state. The number of stores increased in areas with high percentages of poor people of all races, but they also went up in black neighborhoods that weren't so poor.

Parts of Renton, Skyway, Lakewood and South Seattle -- areas with high concentrations of blacks -- have far more payday lenders and far fewer traditional banks than areas with few blacks, even after adjusting for population, poverty, education and income, according to the analysis.

"As an industry, they are cognizant of their target demographic. They need to be close to their target demographic, and that's why they're in black neighborhoods," said Steve Graves, a California State University-Northridge geography professor whose own studies found that payday outlets set up in the poor and minority neighborhoods of Chicago and New Orleans.

"That's where they believe their business is going to be strongest."

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Efforts at regulating the pay day loan industry have fallen flat because of lobbying efforts and political donations.

Supporters of the pay day loan industry claim that customers of these companies know up front what rate they will be paying and are well aware of the conditions of their loans. But, these companies specifically target areas where people have lower incomes and lower levels of education. They lend to people who believe they have no where else to turn, and instead of offering assistance, they offer only a trap.... a cycle of ever growing debt that many cannot find their way out of.