Interest Rate on Payday Loans Over 520 Percent

Check out this mindboggling New York Times article on the financial trap that is catching low-income borrowers in the payday loan industry, where interest rates at short-term "loan shops" can exceed 520 percent:

Earl Milford put up an artificial Christmas tree in the wooden house on the Navajo reservation near here that he shares with a son and daughter-in-law and their two little girls.

But money is scarce and so are presents. “It’s all right,” he said, “they know I love them.”

Mr. Milford is chronically broke because each month, in what he calls “my ritual,” he travels 30 miles to Gallup and visits 16 storefront money-lending shops. Mr. Milford, who is 59 and receives a civil service pension and veteran’s disability benefits, doles out some $1,500 monthly to the lenders just to cover the interest on what he had intended several years ago to be short-term “payday loans.”

Mr. Milford said he had stopped taking out new loans, but many other residents of the Gallup area and countless more people across the country are visiting payday lenders this month, places with names like Cash Cow, Payday Plus and Fast Buck, to get advances of a few hundred dollars to help with holiday expenses.

While such lending is effectively banned in 11 states, including New York, through usury or other laws, it is flourishing in the other 39. The practice is unusually rampant and unregulated in New Mexico, where the Center for Responsible Lending, a private consumer group, calculates that nationally payday loans totaled at least $28 billion in 2005, doubling in five years.

The loans are quick and easy. Customers are usually required to leave a predated personal check that the lender can cash on the next payday, two or four weeks later. They must show a pay stub or proof of regular income, like Social Security, but there is no credit check, which leads to some defaults but, more often, continued extension of the loan, with repeated fees.

In many states, including New Mexico, lenders also make no effort to see if customers have borrowed elsewhere, which is how Mr. Milford could take out so many loans at once. If they repay on time, borrowers pay fees ranging from $15 per $100 borrowed in some states to, in New Mexico, often $20 or more per $100, which translates into an annualized interest rate, for a two-week loan, of 520 percent or more.

In September, Congress, responding to complaints that military personnel were the targets of “predatory lenders,” imposed a limit of 36 percent annual interest on loans to military families. The law will take effect next October and is expected to choke off payday lending to this group because, lenders say, the fees they could charge for a two-week loan would be negligible, little more than 10 cents per day, said Don Gayhardt, president of the Dollar Financial Corporation, which owns a national chain of lenders called Money Marts.

The new law will have little impact on the larger practice because military families account for only a tiny share of payday lending, which lenders defend as meeting a need of low-income workers.

Mr. Gayhardt said the industry had prospered because more people worked in modestly paying service-sector jobs, and in a pinch they found payday loans cheaper and more convenient than bouncing checks, paying late fees on credit cards or having their utilities cut off.

Mr. Gayhardt, who is also a board member of the Community Financial Services Association of America, a trade group that represents about 60 percent of payday lenders, said the frequency of extended rollovers and huge payments was exaggerated by critics.

He said the association supported “fair regulations,” including a cap on two-week fees in the range of $15 to $17 per $100, a level now mandated in several states, including Florida, Illinois and Minnesota. This translates into effective fees of about a dollar a day for those who repay on time, which he said was reasonable given the risks and costs of business.

“We want to treat customers well so they’ll come back,” Mr. Gayhardt said in a telephone interview from his headquarters near Philadelphia.

Way back when I was about 19 or 20, I cashed a paycheck at one of those storefront check-cashing outlets, and they charged me about a 10 percent service fee. I never set foot in one of those stores again, but apparently for a lot of working poor short on cash, there aren't a whole lot of alternatives. While I think individual responsibility is in short supply among those who take out the loans, the industry as a whole appears pretty loathsome -- so it's good more and more states are putting up prohibitions against the practice.