Payday Stores Charge Average Interest of 574%!

“When your back is against the wall, trust me, you’ll do whatever it takes to keep your lights on, a roof over your head and food in your stomach.

Customers can’t go to a bank and borrow $200, which is why Cantu believes payday lenders offer a valued service to people in the communities where the lenders operate.

“Banks aren’t going to fill this space,” said Cantu. “No one else is stepping up to offer short-term credit to this segment of the population that need it most. We have a vested interest in making sure our customers have a positive experience with a payday loan product. If we didn’t we wouldn’t be in business.”

Payday loans are made by private companies licensed by the Wisconsin Department of Financial Institutions (DFI), with lenders based in states including California, Illinois, Utah, Texas and Tennessee. In 2014, these payday lenders loaned more than $37.4 million to consumers in Wisconsin and made $8.4 million from fees and interest charges. The average loan was $320.

DFI data show that the number of loans made by payday lenders dropped 54 percent from 2011 to 2014, and the total amount of money loaned dropped 51 percent (see graphic, below).

According to Pew’s Bourke, payday lenders overall are making fewer loans with a longer duration. Several years ago a typical payday loan was due in two weeks, and most customers took out a second loan. Now, more payday lenders are giving customers four or six weeks to pay back a loan, reducing the number of loans.

“What we’re seeing is a lot of payday lenders starting to offer different types of high-rate installment loans,” said Bourke. “It can appear that that the loan usage is dropping off, but what’s happening is the average loan duration is going up.”

Cantu noted that demand for short-term loans is going up, but consumers have more credit options than they did five years ago. “If you look at the whole spectrum of short-term credit products, not just payday, you’ll see that consumers are borrowing more.”

Cantu added that efforts to regulate payday loans in Wisconsin have led to some reductions in the number of stores, which also helps explain the lower number of payday loans.

‘They make it so easy’

Latoya’s annual salary is $57,000. She’s worked for the same employer for 13 years, and recently took on an additional part-time job that allows her to work from home. She makes good money, so why has she depended on payday loans through the years? “Desperation,” she explained.

Every two weeks, Latoya would bring home a $1,700 paycheck after taxes. “My rent is $1,000, student loans are $594, my car note is $400 – that’s over $2,000 right there,” she said. “I still haven’t factored in utilities, car insurance, groceries or gas. I have no other option. I have no one to help me and they make it so easy to walk in the cash store, answer a few questions and walk out with cash money.”

Advance America payday loan store on South 27th Street in Milwaukee. Photo by Marlita A. Bevenue.

In 2014, Latoya got behind on her bills. Her rent was due, the refrigerator was empty and her dog desperately needed to see the vet. To pay for the dog’s medical treatment, Latoya could either skip paying her bills that month, or take out another payday loan.

Latoya took out another payday loan.

This time she drove to the Cash Store in Grafton. There were no customers sitting in the lobby when Latoya walked in, she said. It was a small, clean business. The customer service workers greeted her instantly and with friendly smiles. She spoke with one of the workers who asked Latoya a series of questions, entering information into a computer and making phone calls to verify her employment and financial institution status.

After 10 minutes, a loan officer said Latoya could borrow $3,200. She decided to borrow $1,600. The loan officer was pleasant and went over the loan agreement thoroughly, she recalled. Latoya understood that even though she was borrowing $1,600, the contract clearly specified she would be responsible for making 12 payments of $357 every other Friday, totaling $4,284. Latoya agreed to pay the amount over a six-month period, and walked out of the store with cash and peace of mind.

Pay up, or else

Latoya made nine payments on time to the Cash Store before falling behind. As part of the loan agreement, she was required to make each payment in person; an 11-mile drive from her North Side home to the Grafton location. When Latoya couldn’t drive to the store one Friday in February because of a bad snowstorm, the Cash Store took the money directly from her account, and continued to make withdrawals, even when the full amount wasn’t available in Latoya’s checking account.

“They didn’t care if I had the money in my account or not,” said Latoya. “I explained to them I needed two weeks to catch up and I was told to refer to my loan contract. Eventually they kept drawing from my bank account three times a week, which caused me to accrue a $36 overdraft fee every time they attempted to debit the money from my account.”

Latoya spoke with a personal banker at PNC Bank. The banker sympathized with her and helped her close the checking account that the Cash Store kept drawing from, she said. PNC Bank even agreed to forgive the $1,700 in overdraft fees that Latoya racked up.

Once PNC Bank closed Latoya’s checking account, the Cash Store referred her account to a collection agency. Latoya now had to deal with harassing phone calls from debt collectors at home and work.

In May, one year after taking out the initial loan of $1,600, Latoya was sued by the Cash Store for $2,131. Because she didn’t show up for her scheduled court hearing after being notified of a pending lawsuit, the Cash Store won the case and began garnishing her paycheck to the tune of $190 every two weeks.

Four out of five payday loans are rolled over or renewed within 14 days, according to the Consumer Financial Protection Bureau (CFPB). The majority of all payday loans are made to borrowers — like Latoya — who renew their loans so many times that they end up paying more in fees than the amount of money they originally borrowed.

Bourke found that the number one problem for borrowers in the payday lending market is unaffordable payments, which drives the cycle of repeat borrowing.

“A typical payday loan, when it comes due on the borrower’s payday, takes more than one-third of their check before taxes are taken out,” Bourke said. “Most people can’t sustain losing one-third of their next paycheck and still make ends meet, and it’s even worse when the typical payday loan borrower is a person that’s living paycheck to paycheck.”

Research conducted by CFPB in 2013 found that nearly half of payday borrowers take out 10 or more loans per year, paying fees on each loan rollover and new loan.

Change is coming

A big change is coming to the payday lending industry.

In 2016, the Consumer Financial Protection Bureau will begin publishing rules to protect consumers from unfair and harmful loan practices. The rules are expected to prevent lenders from rolling over the same loan multiple times and to discontinue mandatory check holding. Check-holding requires the borrower to write a post-dated check for the money owed, or give written permission for the lender to automatically withdraw money from his or her personal bank account — whether the funds are available or not.

Under the new CFPB rules, payday lenders also would have to verify and evaluate a customer’s debt-to-income ratio, the same process traditional banks use. They would be required to take into consideration a customer’s borrowing history when deciding whether the borrower is able to pay back the loan and still cover basic living expenses.

“The payday lending market will be remade,” said Bourke. “We’ve been asking for stronger government regulations in this market, and the CFPB is listening and will put safeguards in place for borrowers that will ensure affordable loan payments, reasonable durations and reasonable loan fees.”

“These CFPB rules will create a new floor that all of the payday lenders will have to follow,” Bourke added. “But some problems will still be left on the table. The CFPB does not have the power to regulate pricing. It will still be up to the state of Wisconsin to regulate payday loan rates, if they choose to do so — and they should.”

For Latoya, new consumer protections can’t come soon enough. Latoya still owes the Cash Store $716, and is paying off the loan automatically every two weeks as a result of a court-ordered wage garnishment.

Asked whether she’d ever take out another payday loan again given her experience, she hesitated. “I hope to God that I don’t ever have to take out another loan. I’m going to try my best to avoid them, but if I do need the money I know it’s there.”

This story was originally published by Milwaukee Neighborhood News Service, where you can find other stories reporting on fifteen city neighborhoods in Milwaukee.

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