Payday loans mushroom in middle class
Dec, 2008
Jones, widely considered an industry pioneer, got his start here in Cleveland, population 38,000, his hometown.
Two decades earlier, he had dropped out of college to work in his father’s credit bureau and collections business.He hit upon the cash-advance idea in 1993 while wooing a job candidate.
“I found him in this old service station and he had a banner up that said, ‘Check Cashing,’ ” Jones said. “When I went in to try to hire him, I had to keep moving out of the way because customers kept coming in and thanking him for being open.”
As Jones tells it, grateful borrowers were happy to trade 20 percent of their next paycheck for a two-week advance rather than miss bill payments or face bank fees for bounced checks.
Still, payday lenders’ profits are only slightly higher than those of banks and other financial institutions, according to a December 2007 study by Vanderbilt University Law School and the University of Oxford.
The study noted that while payday lenders’ interest rates can be astronomical, they also have higher costs because of defaults.
Jones said his company —- which has 1,270 outlets in more than 30 states —- makes $1.12 on the $15 fee it charges on a $100 loan, after labor, overhead and other costs.
In 2007, Congress put a 36 percent rate limit on loans to members of the armed services, effectively ending cash advances to military families.
When Oregon set the same cap in 2007, it all but shut down payday lending there.
"The pendulum has swung a little more toward the side of the consumer action groups," said Daniel O'Sullivan, an
analyst with Utendahl Capital Partners in New York.
But he's not ready to count out the industry just yet.
"At the end of the day, there is a need for the product," O'Sullivan said. "So it comes down to finding something that makes sense for everybody -- something the companies can make money at without putting people into a debt spiral."
-- L.A. Times staff writer Doug Smith contributed to this article.
How payday loans work
Payday loans are available in about three-dozen states, but not Georgia, with varying fees, regulations and maximum amounts that range up to $1,000.
Borrowers must have a checking account, fill out an application, present a driver's license or other official
identification, submit proof of employment such as a pay stub and postdate a personal check to the next payday,
typically two weeks.
The lender agrees to hold the check until the due date, when borrowers have three options:
> Do nothing and allow the check to be cashed by the lender;
> return with cash to buy back the check; or
> "flip" the loan by paying it off and immediately replacing it with a new one -- and paying additional fees.
Source :: Ajc.com
|
