Commercials for the service are on television all the time, and if you scout the landscape while driving through almost any city street, you will notice their large signs with bold typeface seemingly screaming for your attention, with slogans such as "Get $200 today, Pay $202 later."
But many experts say these businesses are not the quick solution they appear to be, maintaining that by taking out one of these loans, people are simply burying themselves deeper in debt.
Kathy Moats, director of Eastern Kentucky University Small Business Development Center, says payday loans may provide a short-term fix for people in a bind, but overall they encourage dependence on quick-fix loans that may eventually prove costly.
"In the long run, I think these types of loans are hurtful to people. What people need are tools to assist them to budget and manage their finances," Moats said.
A payday loan is a service provided by check cashing companies that loan people the money they need until they receive their next paycheck. The procedure is quick and simple; the borrower writes a personal check made out to the lender for the amount of money they need, plus a fee charged by the lender. The lender then gives the borrower the "advance" they need and a payback date is stipulated, usually two to four weeks, depending on when the borrower receives their next paycheck. The lender cashes the check on the date agreed upon, but if the borrower is unable to repay on time, an additional fee is tacked on or interest begins to build. This is where the problem begins; if the borrower cannot pay the money owed, they often take out a second loan to pay off the first, which can quickly compound and lead to soaring debt.
Under current Kentucky law, borrowers can take out two $500 loans per lending institution, with a 14-day annual percentage rating cap set at 459 percent. But with more than 650 payday lenders in the state, including more than five located in Floyd County, the service is widely available and people can easily find other locations to take out more loans. The chance that someone will secure additional loans increases for each loan a borrower takes out that goes into default, as evidenced by the more than 50 small claims and civil suits filed last year in Floyd County by cash advance businesses to recover money lent out.
At Cash Express LLC in Prestonsburg, the process of applying for a loan is similar to that at most payday loan establishments; a person must show proof of a current bank account, pay stub, valid identification and a proof of residence. The borrower produces these items and signs a contract stating they understand the Truth in Lending Act and agree to repay the loan in the agreed upon time, which in the case of Cash Express is two to four weeks. The entire process takes less than ten minutes, depending on how prepared the borrower is.
Garry McNabb, the owner of Cash Express in Prestonsburg, said the business is a necessity these days because it allows people to get small short-term loans which they would be unable to procure through a bank for a variety of reasons, including having no collateral, bad credit or the bank simply doesn't generate such small loans. McNabb said his business, which does not compound interest for late payment and charges $25 to $30 for each check cashed, is a cheap alternative for people who may otherwise write four or five checks that bounce and end of paying a penalty equal to the single loan fee on each individual check.
"It's (our service) a good thing and, truthfully, we serve those who cannot get their check cashed somewhere else," McNabb said. "It's sad for people today because of all the government restrictions on loans."
McNabb said that a small portion of his customers default on their loans and are taken to court, and said there are very few people who take out multiple loans a year through his business. But this runs counter to a report released by the Center for Responsible Lending in November, which found that payday lenders collected nearly 90 percent of their revenue in 2005 from borrowers who could not pay on time, which were the same results the group has reported every year since 2003. The report also stated that the average borrower eventually pays $793 on a $325 loan.
In the 2003 report they concluded that only 1 percent of all payday borrowers take out one loan a year and pay it back on time; 91 percent of payday borrowers take out five or more loans a year. In many cases, people who fail to pay on time take out additional loans to pay off the previous loans. In most states, annual interest rates on loans are capped at 36 percent, while payday loans rates remain under separate legislation and average between 390 and 780 percent annually.
In a forthcoming report set to be released later this year, Donald P. Morgan, a research officer for the Federal Reserve Bank of New York, and Samuel G. Hanson, a Harvard graduate student, report that contrary to what many reports say about the business, payday loans are not predatory and may actually help get people out of debt in the long run. The report notes that payday loan fees and interest rates are lower in cities that have multiple loan stores, which they conclude is a sign that competition helps limit the amount being charged.
The payday loan business arose in the mid-1990s in response to a number of problems people faced, including rising bounced check and overdraft fees and higher fees on late bill payments. The Community Financial Services Association of America estimates there was a rise in payday advance loan firms from 10,000 in 2000 to more than 22,000 in 2004. The purpose is to provide money for people who have no place to turn, and as the service is needed, people will line up to provide it.
"We basically loan money to people who cannot get a loan at a bank for whatever reason, and it's a good thing," McNabb said.