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Payday loans are supposed to be a short-term quick fix for those who can't get traditional credit. But the loans are rarely actually short-term, and borrowers frequently need to take out a second loan to pay off the first. Special correspondent Andrew Schmertz reports from South Dakota, where some are trying to cap triple-digit interest rates that many struggle to pay.
Chasing the Dream:
Poverty and Opportunity in America is a multi-platform public media initiative that provides a deeper understanding of the impact of poverty on American society. Major funding for this initiative is provided by The JPB Foundation. Additional funding is provided by Ford Foundation.
Payday lending is a $46 billion industry in the U.S. About 12 million Americans borrow more than $7 billion annually from over 22,000 storefronts.
But the industry's practices have long been under scrutiny.
Special correspondent Andrew Schmertz has the story from South Dakota, part of our ongoing reporting initiative Chasing the Dream: Poverty and Opportunity in America.
Living paycheck to paycheck isn't easy. Sometimes, you have to come up with creative ways to relieve the stress.
KRISTI MCLAUGHLIN, Wife of T.J. McLaughlin: A good way to just live in denial is just throw away your bills. I know I can't pay them anyway, so…
Kristi McLaughlin and her husband, T.J., were getting by on T.J.'s salary as a manufacturing plant manager here in Sioux Falls, South Dakota, that was, until T.J. got sick.
T.J. MCLAUGHLIN, Borrower:
I was working the night shift, and I was on my feet a lot. And I had a couple of wounds start developing on my leg. And they were pretty small at first, and then they got infected and just started growing.
When T.J. went to get treatment, the doctor said it would only take a day, but, in fact, he ended up missing a whole week of work.
They ended up docking my pay. We ended up being short on bills. I panicked, so…
So McLaughlin came here, a title loan place just a few miles from his home. He says the process was simple and quick. They inspected his car and then handed him $1,200 in cash. He agreed to pay $322 a month for a year.
I was making good money. I didn't really foresee a problem paying it back at that time.
But then his leg got worse, and he had to go back to the hospital for another week.
And on Wednesday of the following week, the H.R. person called from his job and fired him, and, on that day, we pretty much lost everything.
But not the loan. After nine months, the total amount they owed grew from $1,200 to over $3,000. That's an annual interest rate of more than 300 percent.
Title loans and payday loans are supposed to be short-term quick fixes for people who can't get traditional credit.
Do you need fast cash? You have come to the right place.
They use high-energy commercials and bank-like storefronts to entice people to borrow money at triple-digit interest rates. The problem? They are rarely short-term. Borrowers frequently need to take out a second loan to pay off the first one. It's called flipping.
STEVE HICKEY, (R) Former South Dakota State Legislator: The average payday loan in the United States is flipped eight times. And they are a debt trap that's intentionally marketed to the financially unsophisticated, intending to lock them in on something that they can't pay back.
Former state lawmaker Steve Hickey tried to rein in the industry, which charges an average of 574 percent, with legislation to cap interest rates. But he could never get his bills out of committee.
Just not much stomach in the legislature, because the financial sector in our state is such a huge deal. There's millions and millions at stake.
South Dakota has been the epicenter of high interest since the 1980s, when the state repealed laws capping rates to attract jobs from credit card companies like Wells Fargo and Citibank.
The purpose at that time was to bring in 400 Citibank jobs, not to bring in 400 percent interest rates.
Hickey wasn't alone in recognizing the problems created by these short-term loans.
Steve Hildebrand runs Josiah's coffee shop here in Sioux Falls. He's seen the detrimental effects of these high interest rates firsthand.
STEVE HILDEBRAND, South Dakotans for Responsible Lending: I have had employee after employee after employee over the last three years in the coffee shop, going through horrible, horrible financial experiences, taking out these emergency loans, and just getting into this terrible cycle of debt that is incredibly hard for them to get out of.
Hildebrand, an openly gay Democrat who worked on the Obama campaign, didn't have much in common with Hickey, a Republican and conservative Christian pastor who has railed against homosexuality, but they did see eye to eye on what they consider predatory lending.
We created a campaign called South Dakotans for Responsible Lending. Steve and I are chair and co-chair. It's brought people on the right and the left together in a very healthy way.
They decided to use a tactic that was born right here in the Mount Rushmore state in 1898, the ballot initiative.
And you're registered to vote in South Dakota?
Reynold Nesiba is a volunteer gathering signatures to put a measure on the ballot that would do what lawmakers could not: cap interest rates on all loans at 36 percent.
And I feel so strongly about this that I'm the treasurer of this campaign, so that's my name on the bottom. If you're registered to vote, I would love to have your signature.
The goal? To get well more than the 13,871 signatures required to put the issue in front of voters next November. With millions of dollars in revenue at stake, the lending industry is strongly opposed to any new regulation.
Two-thirds of U.S. states allow some form of high-interest-rate loans, and when similar initiatives have sprung up in other states, the industry has fought back. Here in South Dakota, the lending industry is fighting back using a ballot initiative itself.
They were putting forward an 18 percent rate cap in order to convince people they should sign that one, instead of the 36, because 18 sounds better than 36, right?
By that initiative comes with a catch. It only caps rates at 18 percent — quote — "unless the borrower agrees to another rate in writing," meaning if the borrower wants the loan, they have to agree to whatever terms the lender demands.
So, the 18 percent rate cap is just a fake cap.
Teams of paid circulators have been out across the state gathering signatures for that petition. None were willing to speak with us on camera, and repeated requests for comment went unanswered.
When asked about capping rates at 36 percent, the one payday lender who did speak with us was unequivocal.
CHUCK BRENNAN, CEO, Dollar Loan Center:
It's a kill-bill for the state. The entire lending industry would be out of business with it.
Chuck Brennan, a Sioux Falls native, is the founder and CEO of Dollar Loan Center, a chain of more than 90 short-term lending stores, with 11 locations in South Dakota.
We have a huge customer base. In South Dakota, we have had over 40,000 applicants for loans over the years. Over 20 percent of the state who is over 18 has applied for a loan here, which really shows there's a need for the product out there.
Further, Brennan says a rate cap will actually harm the people it is intended to help.
It isn't like when the industry goes out of business people are going to stop needing money. They're going to have to turn to online loans, illegal sources, and something that the state can't regulate.
But Hickey says, in reality, there are plenty of ways to help people who need money without charging them triple-digit interest.
As an employer with employees, I would give a payday advance. I know Steve Hildebrand does at his coffee shop. He will lend somebody money on their paycheck at zero percent interest, and maybe there could even be regulation on that. Four times a year, it's an employee benefit.
After months of hard work, the campaign gathered over 20,000 signatures for Hildebrand to deliver to the secretary of state. But the opposing lender-supported campaign also managed to gather enough signatures to get on the ballot.
The payday lenders are going to spend millions of dollars on television trying to confuse voters and misrepresent our side.
So, the fight's not over. Hildebrand has one year to convince South Dakotans to vote for his interest rate cap. In the meantime, T.J. ended up losing his fight to save his leg. It was amputated six months after he lost his job.
It needs to go at least to there.
T.J. and Kristi are now focused on rehab, instead of the title loan.
I told them to come and get the car. Take it. You know, our world has fallen out from underneath us, and if you want it that badly, come and get it.
Over Thanksgiving, the lender repossessed their car.
People get sick. And, you know, if it's serious enough, they can lose everything. We lost everything in a matter of a week, it seems like.
T.J. and Kristi may have to find their way out of this devastation on their own. But they hope, by speaking out, they can at least save other South Dakotans from becoming trapped in a nightmare of high interest rates.
For the PBS NewsHour, Andrew Schmertz in Sioux Falls, South Dakota.
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