Payday loans: Fast cash, expensive debt trap

Published online on Saturday, Aug. 01, 2009

There are times when Glenda Powell is desperate for money.

When cash runs short, she first looks to her daughter or mother for help. Then, if she must, she turns to a payday lender.

Dozens of these no-frills storefronts all over the Valley will let people borrow against their next paycheck -- for a price. A big price.

"It's my last resort," said Powell, a 48-year-old hospital worker from Fresno. "If they don't have the money, I go to the payday loan."

State law limits payday loans to $300, but nothing says you can't borrow against the same paycheck from more than one company or renew the debt repeatedly. With the loans typically carrying annual interest rates of 460%, that can mean trouble.

"I've had up to four loans at one time," she said. "The situation was bad, and I got deep into it. ... You get into a cycle where you pay this one back, then reborrow. That's how I was doing it for a while, and not making enough money to pay my rent or my bills."

Many states effectively ban payday loans, and a federal law could end the practice nationally. But they're perfectly legal in California.

Payday lenders flourish in low-income areas such as the central San Joaquin Valley. Fresno County, for example, has more of them per capita than any other large county in the state.

Payday lenders say they provide a necessary service at a reasonable cost. Consumer advocates say the companies prey on working-class families, creating a debt trap for the vulnerable.

Experts say payday loans are another example of how the poor pay more for everyday things. People with more money can dip into savings or use credit cards to get cash far more cheaply.

Payday loans have one advantage: they're easy to get. By showing little more than a payroll stub and a photo ID, a person can apply to cash a personal check that the company will hold until payday comes around, usually up to two weeks or a month.

"It seems like the answer. It's so easy to borrow," said Alicia Vasquez, a Fresno pastor who took out a cash-advance loan a couple of years ago when her car conked out a few days before payday. "I thought, this is just something that will tide me over.

"But when it comes to repaying, it's so expensive," said Vasquez.

There are more than 180 licensed payday-loan or cash-advance businesses in Fresno, Kings, Madera, Merced and Tulare counties, according to California Department of Corporations data.

View Payday loans in a larger map

In California, payday lenders can charge up to 15% of the face value of the check in exchange for waiting two weeks to cash it -- the equivalent of an annual percentage rate of 460%. For the maximum amount of $300, that's $45, leaving the customer with $255.

If a borrower's check bounces, the lender can tack on a returned-check charge, usually $15.

Because she was still short of cash after making good on her payday loan, Vasquez immediately took out another loan. By the time she was able to clear the debt -- less than two months after taking out the original loan -- her $255 loan eventually cost her an additional $135.

Who's borrowing?

The central San Joaquin Valley is fertile ground for the payday-loan industry. About one out of every five people in Fresno, Kings, Merced, Madera and Tulare counties lives in poverty.

The region is home to nearly 200 licensed payday lending stores, or about 12 stores for every 100,000 residents. The statewide average is 7 per 100,000.

Fresno attorney Chris Schneider, executive director of the nonprofit Central California Legal Services, said the payday industry is "unscrupulous" in targeting low-income borrowers.