Payday loans Loans to bridge gap may be reined in

By BARBARA L. PARSONS

What starts out as a bridge to gap a shortfall from one paycheck to another can grow into a debt obligation gone awry, as in the case of one Bainbridge family and for countless others who rely on “payday” loans to tide them over.

Sharon Haire of Bainbridge said her family has been through the mill with payday companies trying to pay off small loans.

“I made the mistake of going to a local payday loan company in January 2003 and borrowed $100 until payday,” Haire said. “I paid back $118. That was easy! Then over the course of a few months, I went in and borrowed several more times because either we didn’t make as much that week as we thought we were going to or we wanted to buy something else.”

Haire said money got tight last year when the family income was suddenly diminished due to the economy, and she resorted to payday lenders for help, borrowing $450 “until payday”—two weeks.

Every two weeks she wrote a check to the loan company for $530 to cover the $450 she borrowed plus $80 renewal fee—and borrowed the $450 again. Since January 2003 she has paid nearly $2,000 in renewal fees and is now paying on the $450 principle.

“It never ends unless somebody gets an extra $530 to pay it off once and for all,” Haire said. “In December, I went to the company and said I didn’t have the $530, but I didn’t want to renew the loan anymore, so we agreed to pay $100 every two weeks. We started out paying $100, then $50. Now we’re paying $25 every two weeks and the amount we owe is down to $276.”

She also pays $25 to another payday loan company and $100 to yet another.

“The problem is, when you borrow, say, $200 until payday, then on payday you have to pay back $236,” Haire said. “If you don’t have $236, you have to renew the loan. You have to keep renewing until you come up with an extra $236, or whatever the amount is, that you don’t need for bills.”

Haire said that although the employees of the companies were very nice as long as the Haires kept renewing the loans, they are struggling even to make the $300 per month notes they are paying now. They can’t go to a bank or finance company to get money to pay the loans off because their credit is not good enough, which is why they went the “payday loan route” in the first place.

Her advice to others is simple: “If you can’t pay for something, don’t get it.”

The managers at two of the loan companies mentioned by Haire responded to inquiries by referring them to their main offices. One replied only that Haire does not owe the company very much at the present time.

The Georgia General Assembly addressed tighter regulation of such companies this year, but while some people think the experience of trying to pay off a “payday” loan is one wrought with regret, others feel the payday loan companies are necessary for some segments of the population that don’t pass muster with other financial lenders.

For Terry Ellis, who uses one of the smaller loan companies, borrowing a small amount between paydays has not been a bad experience.

“I can go to the place and write them a check on my account, and it will not go into my bank until I get paid,” Ellis said. “It is a little ‘pricey,’ but I can get a little stretch until my paycheck comes … and it costs me less than a bounced check.”

Fees range from $12.50 to almost $20 per hundred dollars loaned, which translates, when annualized, into interest that sometimes exceeds 1,000 percent if the debt is rolled over.

If the revised version of a payday loan law is signed by Gov. Sonny Perdue, it will become one of the toughest payday loan laws in the country, according to Jean Ann Fox of the Consumer Federation of America in Washington.

The pending legislation
The bill now awaiting final approval from the governor will regulate and penalize an industry that the state legislature says preys on the poor working class, the elderly and military personnel by charging exorbitant interest rates for short-term loans.

According to Rep. Wallace Sholar, representatives for the payday loan industry argued for stricter regulations within the framework of their present operations rather than being forced to apply for industrial loan licenses, since these are rarely granted. They said “this legislation will put thousands of Georgians out of work and leave some citizens who need a short-term loan with no place to turn.”

Payday loan companies have been operating illegally in the state, according to Rep. Johnny Floyd, D-Cordele, and they have “proliferated in our state because existing legal options did not hold people accountable.”

The revised bill includes penalties for exceeding the 60 percent usury fee imposed by the Industrial Loan Act of 1955. Under the final version of the bill, industrial lenders would be exempt from class action lawsuits.

However, the proposed legislation would require payday lending companies to be licensed and adhere to the Industrial Loan Act of 1955. Racketeering charges under the Racketeer Influenced and Corrupt Organizations (RICO) Act may be brought against unlicensed lenders, and they would be subject to class action suits. Enforcement would be carried out by private attorneys, district attorneys or by the state’s Attorney General, and the state could tax profits of illegal lenders at a rate of 50 percent.

First offenders would face a misdemeanor of high and aggravated nature, and those guilty of four convictions would be sentenced with a felony and a fine of up to $10,000. If the bill is signed by the governor, it will become effective May 1.

Why now, why Georgia?
The concern over payday lending resurfaced last year after several media reports on the detrimental effects the payday loan companies were having on military families in Georgia. Base commanders apparently urged lawmakers to adopt payday lending legislation because military personnel were being targeted and exploited by the lenders. The base commanders said “the issue could affect national security and could be considered by the Pentagon when it decides on future base closings.”

The proliferation of payday loan companies in Bainbridge seems to indicate that, like military bases, there are many low-income families in south Georgia who are struggling to make ends meet on payday. There are more than 10 such businesses in Bainbridge that make loans of $100 to $500 to help people get from paycheck to paycheck.

They have counterparts on the Internet where no-credit and bad-credit customers are lured with promises of easy money and easy repayment plans.

If there isn’t enough money on payday to repay the loan plus interest, the loan is automatically renewed. The customer need only pay the renewal fee, or refinance fee, but the original amount is still owed and must be repaid at some future time. Refinancing can go on and on without any of the payment being applied to the principal amount owed.
“Getting in debt was my fault, I know,” Haire said, “but I have learned my lesson the hard way. When I finally get them paid off, they will never see me again.”

One banker’s opinion
Tracy Dixon, president of Bainbridge Bancshares Inc., and a veteran of the banking industry, said he didn’t think it was just Bainbridge being targeted by payday lenders.

“I think you’ll find these types of businesses in most small towns because they are so profitable,” Dixon said. “There is so much fixed expense placed on banks that the paperwork alone that is generated in the loan process as required by banking regulations prohibits us from making small loans.”

Dixon said it was nearly impossible for banks to accommodate small loans because it costs banks just as much to make a $300 loan as it would to make a $20,000 car loan. He said some legitimate loan companies could make the smaller loans for shorter periods of time—from three to six months—and people need to be aware of the danger of making “lump sum” loans that must be paid within a couple of weeks.

“It is a terrible situation for people to get into,” Dixon said. “In such a case, perhaps a person could make an extended loan with a bank to pay off the smaller loans and then avoid doing business with payday loan companies in the future.”

He also said employers could educate their employees, or a course could be offered at the local college teaching people about money management that could save people the experience of dealing with payday loan companies.

“Once you get involved with them,” Dixon said, “it’s very hard to get out of it.”