Guest Column: An insider's view of payday lending in Columbia
Early in my job as a center manager for Advance America, I began noticing the sharp double edge of my work.
Customers walked through the doors to solve a short-term problem, only to walk out with a long-term dilemma. Taking out a payday advance is easy; paying it back is another beast altogether.
A young woman came in one day with her boyfriend and borrowed $500. She said it was to pay for a car repair but later admitted that her beau talked her into taking out the money for him. She was committed to paying it off, even after he skipped town and left her with a mountain of debt. But she found that making minimum payments on each of her four accounts was getting her nowhere.
After paying more than $500 in interest at one store alone during the span of 10 weeks, she filed for Chapter 7 bankruptcy. She was 22.
Members of the Columbia City Council deemed these businesses problematic enough in November 2009 to pass a six-month moratorium on the opening of any new payday loan stores. The moratorium was introduced by former 4th Ward Councilman Jerry Wade to “look at options and see what is best for the community.” Wade lost his race for mayor, and on May 4 the ban expired without mention.
Also this month, legislation drafted by State Rep. Mary Still of Columbia to cap interest rates on payday loans silently expired in the Missouri General Assembly.
There was a committee hearing on payday lending, but it was chaired by Rep. Don Wells of Cabool, who happens to own a payday loan office and invited only proponents of the businesses to testify.
“What people fail to consider is the social cost to the community that these loans inflict,” Still told me. “These companies are tempting people to make bad financial decisions. It is too easy and too tempting for those who are financially unsophisticated. This is a flawed product, and it is siphoning an incredible amount of money from our state.”
Noble idea, ignoble in practice
The payday loan industry is a noble one in theory: It helps consumers avoid costly overdraft fees imposed by banks; it provides a short-term solution in a dreadful economy; it doesn’t solicit new business.
The customer walks into the store and borrows money of his or her own volition.
One of them who came in the door while I was working was a middle-aged auto claims processor at Shelter Insurance. She was subjected to daily overdraft fees at U.S. Bank and decided one afternoon to inquire about an advance. She took out $500 to get her checking account back in the black but soon found the cycle of borrowing hard to break. Anytime her funds got low, she would head back to the store where I worked to borrow another $500, even though she knew she would fork over double that to eventually pay it off.
After more than four years of borrowing, she found herself unequipped to deal with the slightest of financial emergencies. A car accident did not harm her physically but started a domino effect that resulted in her and her 11-year-old daughter moving back home with her mother. She paid thousands of dollars in interest in those four years, with absolutely nothing to show for it.
On average, the Advance America on the east side of town where I worked had about 200 active customers at any given time — 160 of whom were in good standing and maybe 40 who were in NSF (insufficient funds) status, which means their checks had been deposited and returned unpaid. After 90 days without payment, NSF customers became write-off customers. The company expects a 20 percent write-off. It will recoup the investment with the remaining 80 percent customer base in good standing. In 2009, Advance America reported profits of $162.1 million. (That’s money that would otherwise be spent, in large measure, for local goods and services such as groceries and car payments.)
Applying for a payday loan couldn’t be simpler for anyone with a job, a checking account and 15 minutes: You fill out an application and provide copies of pay stubs, bank statements and two photo IDs.
As an employee, I would enter the information into a database, determine what amount of loan the applicant was eligible for (up to $500) and match the payment schedule to his or her pay frequency. (Customers who are paid bi-weekly would have two weeks to repay their loans; monthly customers had up to 31 days, etc.) All customers were extended a series of buy-downs, or minimum payments (companies allow anywhere from three to six), before the full amount of the loan was due.
Let’s say I approved a customer for a $500 loan on a bi-weekly basis. The customer would write me a check for $595 (the extra $95 is an interest surcharge; at Advance America, the annual percentage rate is 495 percent) and post-date it two weeks to the customer’s next payday. When that date arrives, the customer could pay the $595 in cash and be done with the loan or could make a minimum payment of $120 (the $95 in interest, plus an additional $25 toward the principal), re-borrow $475 and write a new post-dated check for $565.25.
Next time around, it’s the same scenario: Pay the $565 in cash, and be done; or extend it again with a payment of $115, and re-borrow $450. If the customer borrowed $500, he or she would spend $851 to repay that loan by exhausting the three minimum payments and paying the loan off in the fourth visit. If the customer neglected to return and pay on the loan, the post-dated check was deposited and collection efforts ensued.
“The one thing you need to remember is that you’re dealing with financially stupid people,” the former regional director of operations at Advance America told me early in my two-year spell with the company. “You need to take advantage of that. That’s the problem with America, right? Everybody wants what they want now, and they don’t care how they’ll pay for it. That’s where we come in.”
One (book) smart customer
One woman in particular might have been “financially stupid,” but her Ph.D. begged otherwise. A sociology professor at a local college, this customer was one of the few who admonished herself openly each and every time she borrowed. She always took out $500 for unknown reasons, scolded herself when she cut the check and slapped the counter in disgust after handing over a crisp $100 bill to pay the interest and roll over the loan. Most customers who need and take out these advances are teachers, nurses, construction workers and administrative assistants. Surprisingly, there are quite a few doctors, professors and business owners in the mix as well.
“This is ridiculous,” she would say without fail during each visit. “I know better than this. I should not be in here. And neither should you.” She simply could not shed her dependence on payday loans. Never did she see her life taking such a drastic turn.
According to some estimates, the average payday customer has four concurrent loans. If that person pays back the loans based on the three-minimums-then-full approach, he or she has spent $3,406 to borrow $2,000. Where would that net loss of $1,406 have been spent otherwise? How much money has been channeled away from local shops, restaurants and businesses? Multiply that $1,406 by how many hundreds of customers are stuck in this predicament, and you’re approaching millions of dollars lost per year within Columbia’s city limits alone.
I would estimate that 90 percent of customers who take out a payday loan cannot afford to pay off their loans when they become due, which causes most to pay off and re-borrow, a statistic the payday loan industry uses to claim that those 90 percent pay off their advances on or before their next payday.
In the example of a $500 loan, the customer pays $95 in interest to keep the $500 for another two weeks. That cycle can continue for years and engages borrowers in a seemingly interminable game of catch-up. The loan never gets paid, even though during the course of a year that customer will have given $2,470 to a company such as Advance America — nearly five times the amount of the original advance.
“Payday loans are nothing but a tax on the poor,” said Shannon Wetzel, resident coordinator for the Department of Pathology and Anatomical Sciences at MU and a rare payday loan customer who would speak openly about her experiences taking them out.
“They do not help people at all but instead put them in worse situations than they were to begin with,” she said “These types of loans are addicting, and people end up taking them merely for convenience. I would never recommend them to anyone, unless someone didn’t have money to put food on the table, their utilities were going to be shut off, something extreme like that.”
Last August, the conservative-leaning Better Business Bureau released a study condemning the allowance of payday lending in nursing homes statewide (Missouri is the only state in the nation to permit such practices). Former Missouri Republican Sen. Jim Talent helped cap the APR for payday loans to military personnel from nearly 400 percent to 36 percent, a model which Still attempted to replicate with her proposed legislation.
Still’s bill was co-signed by 70 lawmakers and had the support of the AARP, Habitat for Humanity, BBB and the Silver Haired Legislature.
But in the end, it came down to money, which the legislators, like the payday borrowers, seem to be desperate for.
“Legislators tend to side with industry,” Still said. “Plus the industry is passing out a lot of money to legislators.”
Kevin Carlson is a former manager of an Advance America store who now works for MU. [email protected]