Money Matters: Payday Loans

Depending on who you talk to, payday loans are either a blessing or a curse.  Suzie King's was a nightmare that lasted about four years.

"I thought I would never get rid of them," she says.  "I felt like I was chained to them."

King took out her first loan online for a reason many parents can understand-- she needed to buy school supplies for her three kids.

"I thought oh wonderful," King says.  "I don't have to worry! I can get my kids all the stuff they need. But I wasn't thinking 'what about next month?"

King took out the biggest loan allowed in California, $255, which required her to pay back a total of $300 on her next payday.  In fact, when you take the loan out you sign a dated $300 check.  But when she could not afford that payment, King-- like so many others-- had to take out a second loan to help pay for the first.

Dr. Randy White says payday lending debt is some of the worst types of debt to get.

"They're actually built on the premise that the vulnerable will come back to you over and over again," White says.

Payday loan companies will tell you they are intended to be used rarely.  But according to the Consumer Financial Protection Bureau (CFPB) four out of five loans are either rolled over or renewed within two weeks.  Half of those are part of a sequence of at least ten loans.  And all those fees can add up, with an annual percentage rate over 450%.

"You'll have two or three payday loans going at one time," White says.  "And when you get to that point, you're in serious debt and serious problems."   

Dawna Hoffman knows those problems all too well.  She spent more than a decade on what payday loan critics call the cycle of debt.

"It was draining my bank account before I could pay bills," Hoffman says.  "And I was back on the cycle again."

Hoffman says she was forced to take out loan after loan-- unable to even scratch the surface.  Eventually, she says she walked away owing thousands.  But still gets text messages almost daily saying she's approved for more. 

But many people defend payday loan companies as necessary and helpful.  One woman says she had a good experience with a payday lender-- that her dog had gotten sick and the loan helped her pay the vet bill.

Payday loan companies echo that sentiment, saying that they fill a need. That people are coming to them for help, simply because there are no other options.

Jabo Covert is the Senior Vice President at Check Into Cash, who says most if not all of the criticism is unwarranted.

"Our detractors love to say they don't like the product, but they don't have an alternative," Covert says.  "(They) don't answer the question of why are we so popular, why do customers use it, why do customers like it, and why doesn't someone else come up with something different and put us out of business. They don't have an answer to those questions."

Covert says customers in California are protected by some of the tightest regulations in the country.  He also points at his companies no-fee payment plan, which gives customers a path to get out of debt.

"No interest, no fees, no extra costs," Covert says, "and people end up getting an extra four pay periods to pay it off in equal installments."

This type of payment plan is offered by multiple payday loan companies, but we found a former industry employee-- not at Check Into Cash-- who says she and her co-workers were told to keep the plan secret from customers.

"They did not want people on the payment plan," she says, "and we were not allowed to tell people about the payment plan."

This woman asked to remain anonymous.  She spent years working in the industry, even as a manager.

"They're legal loan sharks," she says.

One of her biggest criticisms is how she and other employees were instructed to offer customers the maximum $255 loan, even if their own computers said the customer could not afford it.  She says they were told to override the computer's recommendation.

"They literally get you into the higher amount loans knowing that customer can't repay it, that way you stay in the payday loan cycle."

And when state auditors would visit, the former employee says only higher-level employees were allowed at work.  She says they were trained to tell the auditors what they wanted to hear, even if it was not the truth.  She says it rarely was.

"it's hard to sleep at night, to be honest," she says.  "Knowing what you do to customers."

It's stories like these that keep White and his colleagues motivated.

"Do we want to be a kind of community that exploits the vulnerable? Or do we want to be a caring community that's fair in all of its practices? And I want to live in that kind of community," White says.  

As for Hoffman and King, they say they've seen enough to stay away.

"I've learned my lesson," Hoffman says.  "I'm not ever going back."

King agrees.  "I remember when I paid it off, I remember saying to myself never again. Never again."

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