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Payday loan offices have been sprouting up in strip malls and on street corners across America for years before Wall Street collapsed.  In these hard times, more people than ever are using payday loans to keep bill collectors at bay.  Quick money (at interest rates of around 500% or more) for people with bad credit has been praised by some as a lifeline for the poor and condemned by others as a money trap exploiting families in crisis.  Recently some states have passed laws limiting interest rates, but there is one marketplace that knows no borders -- the Internet.

Recently I have been trying to share stories of how Americans have rung up such an astonishing amount of debt in recent years.  For this story, I first staked out a conference on Capitol Hill where online payday lenders and lobbyists honed their arguments to Congress against reform.  

I then traveled to a small town near the Virginia-North Carolina border to learn about the experiences of a man who one day googled "bad credit loans" and soon found himself in more trouble than he bargained for.

Watch:

Illinois Senator Dick Durbin's bill, the Protecting Consumers from Unreasonable Credit Rates Act, has been referred to the Senate Banking Committee where it will be up to the man who seems to be everywhere these days, chairman Chris Dodd (D-Conn.), to schedule a time for the committee to consider the bill.  Durbin's proposal would put a national cap on interest rates at 36%.  So far Dodd has not indicated when, if ever,  he will call a hearing on the bill.    

Originally posted to lagan on Tue Jun 02, 2009 at 12:52 PM PDT.

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Comment Preferences

  •  Payday lenders are loan sharks. (11+ / 0-)

    Legal loan sharks. As Bill Maher mentioned last week, you never hear the word 'loan shark' anymore because we legalized it. It's disgusting and it should be outlawed, both online and in the real world.

  •  Hey, don't you like the free market? (1+ / 0-)
    Recommended by:
    Arken

    (Er, no.  I don't.)

  •  blood sucking pigs! nt (3+ / 0-)
    Recommended by:
    weasel, Arken, beltane

    Poverty does not mean powerless. Unite!

    by War on Error on Tue Jun 02, 2009 at 12:59:10 PM PDT

  •  Maybe we'll end up with regulations as tough as (0+ / 0-)

    the most recent credit card ones...on second thought!!!

  •  and in every ATM (5+ / 0-)

    A lot of banks offer "direct deposit advance" or other similar products, with a "fee" which amounts to an 500% or 600% interest rate.  This stuff shows up not just in branches and malls, but at ATMs too.

    Same exact game as the payday lenders, but far more widespread.

  •  I got one in June of 2007 (5+ / 0-)

    In the amount of $1500.00
    Paid 95 dollars every 2 weeks for almost a year, then I needed the money for more important bills and let it lapse.

    I just settled about a month ago for $364.70, instead of the remaining $1100.00 + balance they wanted under the original loan terms.

    I'll never do that again. That's for sure.

    http://oathkeepersaredangerousmorons.blogspot.com/

    by 19April1775 on Tue Jun 02, 2009 at 01:10:47 PM PDT

  •  Payday lending/Gateway Drug to Ruin (4+ / 0-)

    Not suitable for commerce in my opinion.

    Payday lenders are filling a void that charity is better suited to address.

    It can cost nearly a day's pay at minimum wage for the processing fees a majority of the potential customers the original hardship is more likely than not to explode debt rather than control a crisis.

    Regulations are more than necessary with fees no higher than $10 for all paperwork and no more than 20% annual interest.

    These businesses create more misery than they alleviate.

    They are every bit as bad for communities as an entire block of open and operating crack houses.

    It is time to recognize them for what they are and regulate them in a manner that makes the businesses a benefit rather than a blight.

    "A functioning Democracy must defy economic interests of the elites on behalf of citizens" Christopher Hedges Econ 3.50&Soc. 5.79

    by wmc418 on Tue Jun 02, 2009 at 01:13:41 PM PDT

  •  tip jar? (10+ / 0-)

    I would love to hear more from people who have taken out payday loans.  

  •  Rec this diary up n/t (1+ / 0-)
    Recommended by:
    pidge not midge

    Some people are intolerant, and I CAN'T STAND people like that. -- Tom Lehrer

    by TheCrank on Tue Jun 02, 2009 at 01:32:54 PM PDT

  •  Slightly contrarian view (1+ / 0-)
    Recommended by:
    dennisl

    First, full disclosure...I work at a payday lender with absolutely no shame.  But I will be the first to admit that my company is unusual, in that we do a lot of financial/credit counseling as part of our work with our customers.  But that doesn't change the fact that we are one of those predatory lenders.

    So how do I sleep at night?  Well, I'd rather work my job than at one of the local banks, where a NSF charge is $36...it's often cheaper to take out a payday advance to cover a pending overdraft than to let a check bounce.  The "overdraft protection" offered by banks is also more expensive and less-regulated than most payday advance providers.  And good luck getting a short-term loan from a bank if your brakes go, or you need to have your plumbing fixed.

    We urge our customers to pay down their advances if they can't pay them off and not do another advance; we have fairly strict limits on how much we'll loan, limits which are even more strict than the State limits (some companies will advance you the amount of your paycheck...how would you ever expect to pay it off?); we provide budgeting guidelines so people can start tracking how much they're spending/saving.  It's possible to work in this industry without selling your soul, and while I have no problem with the pending legislation (from what I've read, it won't hurt our business), I do find it tiresome that the industry is so vilified.  Are there true predators? Of course.  But with so little financial education and help provided to the working poor (in particular), what is a feasible, workable option?

    •  Hmmm... (3+ / 0-)
      Recommended by:
      weasel, pidge not midge, JesseCW

      Well, I'd rather work my job than at one of the local banks, where a NSF charge is $36...it's often cheaper to take out a payday advance to cover a pending overdraft than to let a check bounce.

      So charge a fixed fee of $25.

      The "overdraft protection" offered by banks is also more expensive and less-regulated than most payday advance providers.

      That's a huge scam too, that should be reigned in.

      And good luck getting a short-term loan from a bank if your brakes go, or you need to have your plumbing fixed.

      Solvent people have credit cards.  It seems like the point is to take advantage of desperate people who are on the edge of going bankrupt.

      "Dream for just a second and then do it!" -- Kolmogorov

      by theran on Tue Jun 02, 2009 at 02:13:04 PM PDT

      [ Parent ]

      •  So what do you recommend? (0+ / 0-)

        I don't think "predatory lending" is the answer, but what is the answer when someone has to get their car fixed or they'll lose their job?  "Solvent people" may have credit cards, but what about the folks who are just making it from payday to payday (and don't have credit cards)?  I think a lot of what happens in this industry is indefensible, but I spend hours upon hours every day trying to help people find solutions that don't necessarily involve taking out a loan, and often I can't find an answer.  

        •  How am I supposed to know? (0+ / 0-)

          I do know this: if you are charging 700% APR, then you are pretty certain that you are manning the last stop before defaultsville.

          That doesn't make you a hero or villain inherently, but there's no apparent reason your customers are better off for having used this service.

          "Dream for just a second and then do it!" -- Kolmogorov

          by theran on Tue Jun 02, 2009 at 07:06:54 PM PDT

          [ Parent ]

    •  Simple question (4+ / 0-)
      Recommended by:
      theran, silence, pidge not midge, JesseCW

      I do find it tiresome that the industry is so vilified.

      What interest rate do you charge?

    •  Need Hippocratic Oath (2+ / 0-)
      Recommended by:
      Cassandra Waites, JesseCW

      When these operations do no harm they will be responsible portions of the community.

      Realistically, do no harm is an impossibility.

      Since you work for one can you tell me what the percentage of "renewals" or whatever rolling rate of the advances is.

      If the fees generated from these roll-overs are the primary source of revenue, then your business is doing more harm than good, as what you are witnessing is "hooking-up" the client.

      It's effect works along the lines of an addiction, where the user is increasingly more indebted.

      See the above comment where $95 bucks a week for nearly a year reduced a $1500 debt by $400.

      That isn't lending, it is predatory every dollar that goes into those pockets is likely to result in taxpayers spending a dollar to deal with the broken lives and families.

      I have no ill will towards you, it's a job, but you seem to know how much $36 bucks means to people, imagine that 8 out of 10 of those Payday loan customers couldn't open a checking account in their name if they came in with $5000 for the initial deposit in cash.

      "A functioning Democracy must defy economic interests of the elites on behalf of citizens" Christopher Hedges Econ 3.50&Soc. 5.79

      by wmc418 on Tue Jun 02, 2009 at 02:30:44 PM PDT

      [ Parent ]

    •  Just because bankers engage in usury (2+ / 0-)
      Recommended by:
      Cassandra Waites, JesseCW

      via "convenience" and late fees doesn't mean that it's anymore OK for a payday lender to do the same.  And rather than comparing dollar amounts let's talk about APRs instead.  Or about how payday lenders sometimes prey on people by treating them like one of the family  - until it's time to pay off the loan for good.  Or about their intense lobbying efforts.  Or about how they always seem to be located in the poorest parts of town.  There is a distinction between banks and payday lenders and quite frankly, the banks come out on top (and that isn't saying much).

      If the payday lending company you reference is so involved with financial education then it would stand to reason, at least to me, that its customer base would be exponentially shrinking.

      Unthinking respect for authority is the greatest enemy of truth. - Albert Einstein (-6.5/-7.33)

      by pidge not midge on Tue Jun 02, 2009 at 02:31:21 PM PDT

      [ Parent ]

  •  This situation (4+ / 0-)

    grew out of an obscure court case in which a Federal Judge ruled that a creditor had to be sued under the usury laws of the state in which they had their headquarters. That meant that the states that eliminateed usury limits could attract a lot of credit card companies and their jobs. We are the only civilization since the Code of Hamurabai that does not have a usury limit. This has been true since 1974 and is one of the deregulations that have ruined our country. For most of the last two centuries it was illegal to lend money at a rate higher than 18% per annum or 1.5% per month. Its one of the things that has to change if we are to get our country back. A data point not discussed here. To secure one of these loans at most of the corner loan shops you have to write a check. What that means is that these are not people alleviating poverty who could be replaced by charities. These are businesses whose purpose is to bleed the working class, workers who have a steady job and a checkinig account who have come up a little short. Its disgusting.

    "If I pay a man enough money to buy my car, he'll buy my car." Henry Ford

    by johnmorris on Tue Jun 02, 2009 at 02:05:29 PM PDT

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