Kesha Gray needed $100 fast. Her credit-cards were at their limit, she had no home equity to fall back on, and her daughter's day-care bill was due. She saw only one alternative. She went to a "payday lender" and wrote a check for $162, post-dated for two weeks - when she was due to get a paycheck.
When two weeks rolled around, more-pressing bills gobbled up her paycheck, and she couldn't muster the $162 she owed. Instead, she paid a $15 fee to roll over the loan. Two weeks later, she paid the debt. Total annualized interest rate: 924 percent.
"I guess you could say it worked out OK for me in the end," says Ms. Gray (not her real name). "But I'll never do that again. Never."
Payday lending is growing nationwide, sparking an unprecedented small-dollar borrowing binge and a controversy over what it means for personal debt. From fewer than 1,000 stores in 1995, it has mushroomed to hamburger-stand prevalence with 10,000 outlets across the US.
But its rapid growth and high fees have led consumer advocates to deride the practice as legal loan sharking. Several lawsuits have targeted the industry, and states such as California and Florida have this month considered regulating the practice.
Still, with lenders taking in more than $1 billion in fees last year - and expecting to take in another $2 billion this year, the trend is only growing.
"It's a phenomenon, no question," says John Caskey, an economist at Swarthmore College in Pennsylvania and an expert in consumer finance. "Payday lending has exploded. A few markets are saturated now, but for the most part you keep seeing new states open up and the industry rushes in and grows rapidly."
Payday-lending storefronts often resemble post offices, with service windows set behind bulletproof glass. Typically, a borrower gives evidence of a checking account, employment, and permanent residence, along with a post-dated check for an amount usually ranging from $100 to $300, plus a fee generally in the 15 to 20 percent range.
The loan comes due on the borrower's next payday. At that point, the payday lender can simply process the check, accept repayment in cash and tear up the check, or roll over the loan.
Critics complain that fees collected by payday lenders - between 300 and 2,000 percent if tabulated annually, according to one study- are exorbitant. They also contend that payday lenders purposely aim to mire unwitting consumers in perpetual debt, saddling themselves with a dozen or more payday loans.
"The idea of usury protection goes back centuries," says Jean Ann Fox, director of consumer protection for the Consumer Federation of America. "In this country, we developed small-loan usury laws to protect the needy from the greedy. The wave of legalized payday lending that has swept through some states ... has been aimed at getting special exceptions to that law."
Perhaps the most serious charge against the industry is that payday lenders use coercive collection techniques. In some cases, when borrowers have defaulted, payday lenders have threatened to bring criminal charges, claiming the personal checks they hold from borrowers are not "bounced" checks, but "bad" or fraudulent checks.
The payday-lending industry flatly rejects such allegations. "We require that our customers have a checking account, a job, and a home residence," says David Davis, president of Check 'N Go, a Cincinnati-based payday lender. "That doesn't describe someone who's poor or incapable of making a thoughtful decision.... The fact that this product has been embraced by millions of American consumers proves it's meeting a need."
In addition, industry spokespeople say, extrapolating annualized interest rates from their short-term loan fees is ridiculous. It's the equivalent of saying a $20 cab ride in Los Angeles is unfair because it would cost $10,000 if you kept riding to New York.
Even Professor Caskey, who does not endorse payday lending, says the relatively high fee structure is needed to survive. "A $15 fee on a $100 loan for two weeks allows them to flourish [391 percent annual rate]," he says. "Somewhere near the range of $10 or slightly under on a loan of $100 for two weeks, is where you start seeing they can't operate."
And members of the industry say those who coerce collection are being punished by state laws and self-policing. "In every industry there are a few bad actors," says Mr. Davis. "The egregious examples you find out there ... clearly are the exception rather than the rule. One of the biggest misconceptions is that this business is not regulated. Nothing could be further from the truth."
With the recent addition of Arizona, 24 states now allow some form of payday lending. Eight others have no interest-rate cap, which effectively allows the practice to flourish. Eighteen states, meanwhile, have outlawed it, although a legal loophole allows payday lenders there to team with out-of-state banks to offer loans.
States' laws vary widely, but most typically cap loans at $500 and set a maximum fee. They are mixed when it comes to prohibiting multiple rollovers.
"It will be interesting to see what happens in the next economic downturn," says Ms. Fox. "Payday lending has taken off in a booming economy. If layoffs and plant closings cause borrowers to go into bankruptcy in record numbers, there may be a lot less tolerance for the industry."
(c) Copyright 2000. The Christian Science Publishing Society