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The New Loan Sharks

Payday lenders have more tricks up their sleeves

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Mary Love wants you to know: You don't have to be poor to be a victim of payday loans.

Love, 67, is a divorced LaGrange, Kentucky, resident and a minister in the Presbyterian Church (U.S.A.). When she got her first payday loan, in 2003, she wasn't destitute; she was working for UPS Logistics in Louisville. But she'd fallen behind on her rent.

Her first loan was for $200. She doesn't recall the name of the place that sold her the short-term cash advance. "They were everywhere," she says of the storefront operation. Love wrote a check for $230, including the $30 fee for the cost of the loan. The lender handed her $200 in cash. Two weeks later, Love came back to retrieve the check and repay the loan in cash.

check and shark in a pool of water

Payday loans are billed as quick cash advances to help borrowers deal with money emergencies between paychecks. — Travis Rathbone

Now, though, she was out of money again. So she wrote the store another check, but for twice as much — $460, including a $60 finance charge for the second loan — because she needed to pay off other bills. This cycle of repeat borrowing spun on for months. By the end of the year, Love says, she'd spent $1,450 in fees. Two years later, with the debt still churning and no end in sight, Love was living rent-free in her sister's basement and relying on temp work to pay off the loans.

With more than 20,000 locations in 33 states, storefront payday lenders, like the one Love used, are familiar sights. But people seeking quick cash now have other options: Nationwide, borrowers can go online to find Internet payday lenders; in all but 13 states, traditional banks, including Wells Fargo and U.S. Bank, offer payday-style loans. All three avenues lead to a similar kind of high-cost credit: short-term loans with sky-high interest rates that typically must be fully paid off in two weeks. Storefront operations require borrowers to submit a postdated check, which is deposited two weeks after the loan is made (in theory, a borrower's next payday). Internet and bank lenders demand even more: Borrowers must give checking account access to lenders, who can withdraw money as soon as it is deposited.

Payday loans are billed as quick cash advances to help borrowers deal with money emergencies between paychecks. Some 19 million Americans use storefront and Internet lenders, spending well over $7 billion a year on fees, says Richard Cordray, the head of the new Consumer Financial Protection Bureau (CFPB), which has supervisory authority over the industry. But it can be a grievously expensive form of credit. According to a 2012 report from The Pew Charitable Trusts, the average borrower takes out eight loans per year at $375 each, paying about $520 in fees alone. That's bad enough for someone with a regular job, but even worse for retired people on fixed incomes. The Center for Responsible Lending's 2011 report on payday loans estimates that fully a quarter of bank payday-loan borrowers are on Social Security.

Lenders aren't supposed to require an assignment of government benefits as a condition of granting a loan. But consumer advocates believe that lenders covet borrowers on Social Security because their income is more secure than that of working borrowers. "Seven out of nine chains that we surveyed said they would make loans to people on unemployment, disability or Social Security," says David Rothstein, author of a 2009 study on payday lending for Policy Matters Ohio. "Those are some of the most vulnerable people in the state."

Payday lenders also aggressively collect debt from borrowers who bounce checks, even garnishing (seizing) Social Security benefits. Technically, the 1935 Social Security Act bars creditors from garnishing benefits. But because the transaction usually takes place between the lender and a local bank, it often escapes regulatory notice. That's what Randy Morse of Lynchburg, Virginia, discovered when a local Allied Cash Advance outlet threatened his 96-year-old mother with garnishment last March. She had fallen behind on a loan she'd taken out the previous September.

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A look at payday loan practices, which proponents refer to as an effective consumer service while others refer to it as a debt trap.

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