PAYDAY LOANS HIT PAY DIRT
CONSUMER DEMAND IS DRIVING THE PROLIFERATION OF STORES THAT OFFER LOANS AT HIGH RATES AGAINST A WORKER'S FUTURE PAYCHECK.
By Melissa Wahl
Tribune Staff Writer
November 18, 1999
The political uproar over the growing payday-loan industry belies a basic economic fact: Some people are willing to pay high rates to get small, short-term loans, which many banks no longer offer.
States and cities are fighting the proliferation of payday-loan offices, which offer loans against workers' future paychecks.
The Chicago City Council, for example, passed a measure in early November requiring special city permission to open payday-loan stores. And Cook County State's Atty. Richard Devine's office has sued one Chicago-area payday-loan company, saying it illegally harassed customers to get them to pay back loans. Meanwhile, state legislators have been holding hearings to determine whether the industry needs more regulation.
But consumer demand has led to the growth of payday-loan stores in Illinois. From just a handful four years ago, the state now has more than 800, including those operating out of currency exchanges.
That expansion has come despite the fact that most of the stores charge what amounts to an annual interest rate of more than 500 percent on their loans, which outrages some politicians and consumer groups.
But because borrowers often repay the loans in one to two weeks, most people pay far less than 500 percent. A common rate in Chicago is $10 for every $100 borrowed per week.
There is no ceiling on the rates that payday-loan stores in Illinois are allowed to charge.
Some consumers become dependent on the loans or get too many at one time.
"Once people get into it, it's very difficult for them to get out," said Robert Ruiz, chief of the public interest bureau of the Cook County state's attorney's office. "Unfortunately, the exorbitant rates are perfectly legal."
Because of the high rates, payday-loan stores are quite lucrative. They cost about $120,000 to open, and get an investment return of 23.8 percent, according to a recent research report by Stephens Inc. in Little Rock, Ark.
The high-profit potential has led to some consolidation in the industry, with companies such as suburban Chicago's Sonoma Financial Corp. looking to expand. Already Sonoma has grown from two stores at the end of 1997 to 44 stores in the Chicago area and four in Indiana. After its pending merger with the Easy Money Group of Virginia Beach, Va., it will have 170 stores in 19 states.
Frank Anthony Contaldo, chief executive of Sonoma, said his stores often get references from banks. "Banks used to do this 20, 30, 40 years ago, but with all the mergers, there's no place for the common guy to go just to get a few bucks now," Contaldo said.
Katherine Williams, president of Consumer Credit Counseling of Greater Chicago, concurs, saying that many banks have stopped making small loans as they have merged and gotten bigger.
"The payday-loan stores fill a void in the marketplace that the banks and financial institutions have stepped away from--very small, uncollateralized loans," Williams said.
She said consumers get in trouble with payday loans when they abuse the system, such as when they go from from store to store getting advance loans on the same future paycheck.
Typically, though, the payday loans--which are seldom larger than $500 each--do not singlehandedly put people into bankruptcy or serious financial trouble, Williams said.
"Payday loans are just part of the chain of debt," she said. Of the 1,000 clients her group sees each month, only about 60 or 70 have unpaid payday loans, and they are usually encumbered with other debt.
Ed Mierzwinski of the U.S. Public Interest Research Group in Washington, who says the payday-loan industry abuses consumers, says the long-term answer is to "force banks to make these loans."
"If we can't do that, though, we'd like more regulation of payday-loan stores. They're like legal loan sharks," Mierzwinski said.
Payday-loan offices are regulated at the state level. In Illinois, the Department of Financial Institutions oversees the industry, and officials there say they rarely get complaints about payday loans.
"We receive intermittent complaints, but we haven't received an enormous number by any means," said Mary Kendrigan, spokeswoman for the department. "There's demand in the marketplace."
In October, the department released a study showing that the average payday-loan customer in Illinois is a woman in her mid-30s earning just over $25,000 a year, the study found.
The department does not plan to increase regulation but is working on a consumer education program, Kendrigan said.
"It seems to us that in lieu of any (additional) regulation, the focus needs to be on consumer education," she said. "We're working to get the message out that short-term loans, especially payday loans, are not a bad tool if people use them as they were intended to be used, which is as a stopgap measure when people are experiencing a short-term financial crunch."
People need to be reminded to pay their loans back on time, to comparison shop for rates including checking local banks and credit unions, and to read the entire payday-loan contract if they do go that route, Kendrigan said.
John Falk, a corrections officer in the Chicago area, has been pleased with his payday-loan experiences at an E-Z Payday Advance store in Crystal Lake.
"I'm curious that people are trying to say the stores are a ripoff and are preying on people. If you use it properly, it's a convenience," said Falk, who has used the loans for unexpected car and home repairs.
Falk's wife, Anne, feels a little differently about the loans. She said she would prefer that they saved the money they are spending on loan fees, but she still views the loans as a convenience.
John McCarthy, who manages the store where Falk gets his loans, balks at the idea that his industry is pushing people over the edge financially.
"The money people get from payday stores doesn't push them into bankruptcy. If that happens, then they were in big trouble before they came to the payday store," said McCarthy, who is secretary of the Illinois Small Loan Association, a payday-loan industry group. |
