No-questions-asked banking fills a void; interest rates as high as 60% for 60 days
By ROMANO CEDILLOS
Pay $45 to get $300 with no credit checks?
Sounds like a great deal.
But there is a catch: The loan must be repaid in two weeks or the borrower will be charged more. With a possibility of the loan being rolled over for a total of 60 days – at a cost of $45 every two weeks, that means the $300, 60-day loan cost you $180 – about a 60 percent interest rate.
Not quite the good deal after all.
But what these “payday loan” operations offer is fast money and no credit checks – both of which are appealing to those in need of quick cash. And while some people have gotten into financial trouble using these loans, others see them as a viable option.
“Banks always want some kind of collateral or real good credit,” said South Tucson resident John Martinez.
“(Payday lending) is a nice commodity for the community,” said Martinez, a frequent payday loan customer. “You may have to pay $45 for $300, but that’s not bad. And the service is helpful as long as you’re conscientious about paying it back.”
But these lending operations are in the center of controversy, with one side claiming these companies are making millions of dollars on the backs of Pima County’s most impoverished residents.
Lenders say they are filling a need and not breaking any laws.
A recent study by the Southwest Center for Economic Integrity, a consumer advocacy group, says businesses, known as deferred-presentment companies, offering two-week payday loans are more likely than banks and credit unions to locate in low-income, high-stress, Latino neighborhoods.
“We mapped out these institutions,” said Karin Uhlick, executive director of the center. “If you look at the characteristics in those areas, it’s clear that (payday lenders) are attempting to reach certain sectors of the community.”
The report, published last month, says “83 percent of payday-loan locations are within one-quarter mile of high/medium stress areas, compared to credit unions at 69 percent, and banks at 56 percent.
“Sixty-seven percent of payday-loan locations are within one-quarter mile of high-poverty areas,” the report says, “compared to credit unions at 51 percent, and banks at 34 percent.”
Most of the money payday lenders make is due to what is known as a “rollover,” Uhlick says. That is when the customer cannot repay the loan and fee in the allotted two weeks and opts to pay only the fee and write another check for the amount of the initial loan, plus another fee. State law allows three rollovers after the initial loan.
“I won’t say payday lenders are directly targeting a certain demographic,” District 25 state Rep. Manuel Alvarez said, “but they are making it much easier for low-paid people to get into a debt they can’t handle.”
The rise in the state’s bankruptcy rate from 2000 to 2003 is partly due to payday loan customers not paying off their loans in the first two weeks, Alvarez said. He is introducing a bill that aims to eliminate the rollover.
Uhlick said the payday lending industry “is also apparently trying to reach a certain demographic, such as senior citizens on Social Security and the working poor.”
The Pima Council on Aging is concerned with the operation of payday lenders. In separate cases, two elderly Tucson women became so indebted to payday lenders they had to get help from Jennifer Walker, client advocate for the agency. Walker said one of the women was spending half her monthly Social Security check on her payday loan.
“The interest rate these places charge is usurious,” Walker said. “And it’s especially sad when an elderly widow uses a loan like this to fix the car she needs in order to get to her doctor.”
But Jonathan Paton, the southern Arizona spokesman for the Community Financial Services Association, a payday lending industry group, said his members strictly adhere to state lending laws. He also said it is impossible for lenders to be selective when it comes to a customer’s age.
Could lenders simply stop lending to seniors on fixed incomes? That could leave the lenders open to complaints of discrimination, Paton said.
“What are we supposed to do, tell people: ‘We can’t give you a loan because you’re too old?’” he asked.
Uhlick’s office has not accused the payday lending industry, which it refers to as “fringe banking,” of breaking the law, but she says it is concerned with its ability to use “loopholes” that enable it to charge annual percentage rates 500 percent and higher when state law caps them at 36 percent.
“We’re always concerned with lending practices that impact vulnerable citizens,” said Robert Zumoff, assistant state attorney in the Consumer Protection and Advocacy section. “But I’m not aware of any targeting complaints against payday lenders. They’re not doing anything illegal, as far as I know, but I am interested in reading the study.”
Paton says the industry provides an important avenue for those who suddenly find themselves in a financial crunch.
There are many payday lenders in Tucson’s middle-income neighborhoods, Paton said. A look through the phone book shows several payday-lending offices in middle-income areas such as the city’s East and Northwest sides and midtown neighborhoods.
But the study is flawed, Paton said, because it does not differentiate between payday lending facilities and check-cashing outlets, most of which Paton does not represent. There are many more check-cashing outlets within the county’s low-income areas, he said. Most of the fees charged at these outlets are for check cashing and not payday loans, which the outlet may or may not offer.
The typical check-cashing customer needs no proof of regular income and, in most cases, does not have a checking account, both of which payday lenders require, he said.
The absence of the traditional banking community within low-income and high-stress neighborhoods “has left a vacuum in some parts of town,” Ward 5 Councilman Steve Leal said.
Of the 80 payday lenders that opened for business in the county from early 2000 to August 2003, more are in Ward 5, which covers most of the South Side of Tucson, than in any other ward, Leal said.
“When banks and credit unions moved out, nontraditional banking services moved in to respond to this niche market. But I don’t believe these folks are guilty of violating predatory-lending laws,” he said.
“It’s unlikely that payday lenders are targeting low-income people,” said Bruce Tunell, deputy superintendent of the Arizona State Banking Department, the agency that regulates payday lenders, “because the usage of the payday loan cuts across the economic spectrum.”
Tunell’s office has not received complaints of lenders targeting certain demographics anywhere in Arizona, he said.
Nicholas M. Boehler, manager of the Advance America center at 4990 S. Campbell Ave., which charges a 391.07 annual percentage rate, says his company does not focus on rollovers to make money.
Boehler’s loan outlet competes with four other payday lenders in the area. A Bank of America branch and a Wells Fargo Bank teller machine are also close by.
“Our loans are meant to be a short-term solution to an immediate problem,” Boehler said. “We’ve had thousands of customers use our service since we opened in 2000. Of those, only about 400 or so are active customers. Most people pay their loans and we never see them again.”
What is a payday loan?
A payday loan is a small cash advance secured by a personal check. These loans of $50 to $500 are due in full on the borrower’s next payday or within 14 days.
If the borrower is unable to repay the loan plus a 15 percent fee within two weeks, the lender allows for the loan to be extended, or rolled over, by having the borrower pay only the interest on the loan. The amount of the loan, plus another 15 percent fee, becomes due at the end of the second two-week period.
Payday loans are also known as cash-advance loans, check-advance loans, post-dated loans, and deferred-deposit check loans.
FOR MORE INFORMATION
• Payday loan information: www.cfsa.net
• Information on managing finances is available at Consumer Credit Counseling’s Web site: www.moneymanagement.org
STUDY FINDINGS ON PAYDAY LOANS
Other findings of the Southwest Center for Economic Integrity study on Pima County’s payday-loan industry:
• 37 percent of payday lenders are within one-quarter mile of areas with populations at least 50 percent Hispanic. Only 19 percent of banks and 18 percent of credit unions are in these areas.
• 60 percent of borrowers are women.
• 56 percent of borrowers are Hispanic.
• Typical annual percentage rate for payday loans is between 390 percent and 500 percent.
• $130 million worth of payday loans are issued annually in Pima County.
• $20 million in payday-loan fees paid by Pima County residents.
• Less than half (40 percent) of the borrowers repay their loans in the initial two-week period. Most people take three or more weeks to pay off loan.
• Some payday-loan customers surveyed took 10 weeks or more to pay off their loans. One person took 24 weeks. This customer said he paid fees totalling $612 on a $300 loan.
• 23 percent of borrowers use payday loans for an emergency (i.e. medical, car repair, travel costs due to death in family, etc.).
• 67 percent use the service to pay for general bills (i.e. groceries, rent, utilities, etc.).
A copy of the study can be requested by e-mail from the Southwest Center for Economic Integrity at: firstname.lastname@example.org, or by calling the center at 971-1472.
ILLUSTRATION: Borrowing $300: what will it really cost
Fee 60 days Other fees
- Flat fee: 15% on two-week loans, 60% over 60 days. Typical annual percentage rate is 390% to to 500% $180 None
Bank credit card advance:
13.13% APR (average) $5 Possible cash-advance fee: 1%-4% ($3-$12)
Credit union cash card advance
10.2 APR (average) $3 Possible cash-advance fee: 1%-4$ ($3-$12)
Bank or credit union personal loan:
14.12 APR (average) $7 Many credit cards charge 0% if the cash advance is paid in full within the card’s 20- to 30-day grace period; however, a cash-advance fee may still apply.)
Source: Interest rates according to Bankrate.com as of Jan. 9/Tucson Citizen
PHOTO CAPTION: JEFF STANTON/Tucson Citizen
Advance America Cash Advance Centers carries a list of loan amounts and associated fees at its counter. In the foreground is Nicholas M. Boehler, manager of the branch at 4990 S. Campbell Ave. Operations manager Charlotte Thomas is in the background.