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Payday Loans - A Primer

By Jonathan Jones

Over the last decade, payday loan centers, also known as paycheck or payday advance centers, have popped up across the country as well as online. Today, there are twice as many payday lenders in the United States as there are Starbucks, lending out more than $40 billion dollars a year.

They Appeal to Low-Income Individuals

The tens of millions of people using payday loan centers generally live paycheck to paycheck. Payday lenders appeal to low-income individuals because the rates are straightforward, the loans are immediate, and it won't ruin a person's credit history. The typical fee is $15 for every hundred dollars borrowed against their next paycheck, which translates into extraordinarily high annual interest rates, often exceeding 400 percent. The growth of the industry mirrors the tremendous growth of the low-wage service industry.

Feds Leave it to States to Establish Regulations

The U.S. government hasn't imposed regulations on payday loan centers, leaving it to individual states to write the rules governing their operations. loan centers are illegal in 15 states, the District of Columbia, and it is effectively outlawed to give a payday loan to a member of the military or their family.

No Credit Card Needed -- Just a Checkbook and Valid ID

Payday lending centers allow customers to come in and write a personal check that the center agrees not to cash until their next payday. On that payday, customers can either pay back the loan in cash to redeem that check, or allow the center to cash the check.

"[It's a] simple process," says Rick Lake, CEO of California Check Cashing. "The customer comes in, gives us their information. We verify it and process the transaction, usually within less than 10 minutes, so the customer's enabled to get the cash that they need in a relatively no-hassle, speedy way."

A Debt Cycle?

According to Consumers Union, the nonprofit arm of Consumer Reports, payday lenders become a trap for low-income consumers who are often desperately in debt, because they end up taking out another loan to pay back the previous month's loan.

"The high rates make it difficult for many borrowers to repay the loan, thus putting many consumers on a perpetual debt treadmill," the report states. "For already desperate people, borrowing more money at triple-digit interest rates is like throwing gasoline on a fire, … [it's] never the right solution for people in debt. Instead, payday loans make problems worse."

A Necessary Service for Those who Can't Get Credit?

Lake disagrees with critics of payday lenders. He argues that these stores are a necessity for those who can't obtain credit, and that unlike banks, payday lenders are straightforward and transparent in terms of their interest rates and fees attached to the loan.

"Debt trap, to me, just the commonsense definition of that is going to be that ... there was something unknown about the product," Lake tells FRONTLINE. "You've been in our stores. You've seen our posters; you've seen our disclosures. Did you at any time feel that there was something you didn't know?"

Jonathan Jones is a journalist with the Investigative Reporting Program in Berkeley, California. He is currently working on a book about the rubber industry in West Africa.

posted november 24, 2009

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