Check cashing centers with payday loan services are a flourishing $450 million business in California, with more than 50 locations in South Los Angeles. And that number, and their location, is no coincidence.
“Pay day lenders appear to target African American and Latino communities,” said Gina Green, a spokesperson for the Center for Responsible Lending (CRL) in Oakland, Calif. A CRL report released last month showed that check-cashing services are a thriving business and are eight times more frequent in African American and Latino communities–like those in South Los Angeles. The center also estimates 55 percent of payday loan customers in California are African American or Latino. And in the midst of an economic recession, some have no choice but to turn to pay day loan services when they need a little extra cash.While these centers provide customers with an array of services — like cashing checks, money orders and namely payday advance loans — the high-interest loans against future earnings draw considerable criticism and worry from consumer protection advocates. “Our major problem with payday loans is that they are a death trap,” said Green, who tries to advise her clients against using them at all costs.
The Center for Responsible Lending released
a report in March 2009 titled “Predatory Profiling:
The Role of Race and Ethnicity in the Location of
Payday Lenders in California.” The report analyzes how payday-lending centers seem to be heavily concentrated in African American and Latino communities. Take a look at it by the numbers: $247 million is drained annually from California’s African-American and Latino communities to service payday loans. 55 percent of all payday loan borrowers are either Latino or African American. 8 times more is the frequency of payday lenders concentrated in neighborhoods with the largest shares of African Americans and Latinos as compared to white neighborhoods. $450 million in payday loan fees are paid annually in California.
Businesses thrive on repeat borrowers: 90 percent of business generated at payday loan centers is by borrowers with at least five loans per year. 60 percent of business generated by borrowers with at least 12 loans a year. What the CRL recommends to protect people from the high fees of payday loans: 36 percent interest rate cap on small loan products, like the ones already in place in 15 states and the District of Columbia.
Pay day loans work like this: The customer writes a check to the lender for $300 and gets a short-term cash loan. But the borrower only gets $255 in cash – an amount limited by state law — and the rest is a fee paid to the lender. The borrower usually has until their next paycheck, or 31 days, to repay the loan. In California, lenders are not allowed to exceed a $300 loan limit, and a maximum fee of 15 percent of the check value, according to the California Department of Corporations, a state agency all pay day lenders must register with.
Only option for many
The high fees can be crippling, but for some, these loans get them through rough economic patches. Sharon, a middle-aged womanwho declined to give her last name, said she went to the Payday Advance Center on Crenshaw Boulevard on a Friday evening to get a $255 loan that she would pay back upon her next pay check. Like others interviewed for this story, Sharon did not want her full name used because friends and neighbors would know her personal financial information, but she was willing to share about her experience with pay day loans. She said this was the only place that would help get her cash immediately.
“You can’t go to the bank to get a loan. Even though you have a bank account and a steady income,” she said, adding that she comes here every three months to catch up. Or, she said, “when I’m short on my bills.”
She said sometimes her paycheck is not enough to cover all the monthly necessities such as rent and utilities at the end of the month. And she can’t turn to her bank, Washington Mutual, to get a loan.
“I can’t go to my bank and say, ‘can I have a personal loan?’They’re not going to give it to me. So I come here,” said Sharon.
However, she realizes the cost can add up at a center like this. So, she said she makes sure to pay back the loan on her next pay check. “They charge astronomical amounts for the fees,” she said. “That’s why these speedy loan places do so well.” But these fees associated with pay day loans can become large over time if people are not aware of the trap.
“We always recommend clients stay away from it,” said Evelyn Jovel, a credit counselor at the L.A.-based non-profit, By Design Financial Solutions. “You’ll end up paying a lot more. Like up to 400 percent annually.”
While some don’t use the payday loan system yet, they have not ruled it out despite the hefty fees. Matthew, a young man using a pay day loan center on La Brea Avenue, said he was just fired from his job and wouldn’t hesitate to get a payday loan provided he qualified.
“Yeah. That’s if I can get a bank account,” Matthew said. “You need a bank account to get a loan.”
Why it costs more to be poor
And another customer, Leslie, at a payday center at Adams Boulevard and La Brea Avenue in the late afternoon took Jovel’s advice and just came in to purchase a money order. Leslie said she steers clear of payday loans altogether.
“That just gets me in debt, I’m trying to get out of debt,” she said. “That gets me deeper in debt.”
Indeed, the California Department of Corporations said the annual percentage rate for pay day borrowers can often exceed 400 percent each year. And that is steep considering a new car can run you an annual rate of around 7 percent, according to national average rates on Bankrate.com.
But people still enter into payday loans to get that boost in cash—despite the long-term implications.
“They’re worse than credit cards,” said Jovel. “I don’t even know why they are legal. You never get out of that debt unless you pay it off.”
Jovel said at By Design, a Commerce, Calif.-based organization offering counseling on bankruptcy, housing, personal budgeting and credit, she notices many people fall into payday loans as a way to avoid other debt such as credit cards.
She said for many people, their pay checks cover their monthy expenses, but when they get a credit card bill that exceeds their funds, they run to get a payday advance to pay it off. “There are a lot who get really desperate, and they run to these companies,” she said. “Their income might be enough to cover essentials. But a lot go to take money out to pay for a payment that is due.”
But she said pay day lenders are not the solution. They are just another problem.
“I would just tell clients, don’t pay the credit card. You’re just going in a circle. Deeper in a hole,’” said Jovel.
Jovel advises clients to resolve issues before going to a pay day loan center by making a budget, or if things get tough, try and reach out to friends or family. Pay day loans should be a last resort, she said.
“The first thing is to stay away from them,” said Jovel. “If you ask me to choose a credit card with high interest—I would use a credit card” instead of a pay day advance, she said.
‘Damned if you, damned if you don’t’
But for some people like Sharon, when she needs a loan, these centers deliver in a way banks can’t. “The criteria is so high for poor people to get a loan,” she said of the bank standards to get a little extra cash.
But at the Payday Advance center, Sharon can get extra cash fast and, “they don’t check your credit score,” she said.
However, if clients get in over their heads, helping fix their mistakes with pay day loans can often be a costly venture. “If we try to put them on payment plans, [lenders] charge really high interest rates,” said Jovel.
Although By Design does not carry formal literature warning customers about check cashing centers, Jovel said they try to warn clients. “We try to put the word out there, word of mouth helps,” she said.
Another issue is people can take out another pay day loan from a different center when they find they cannot pay back an existing loan. However, the California Department of Corporations warns against this.
“This can begin a dangerous cycle of debt that may lead to financial disaster,” according to the state agency’s website.
Ninda came in to pay off her pay day loan from a few weeks ago at the center on Adams and La Brea with her niece one afternoon. Although this wasn’t her first time using the service, she was still unhappy with the fees.
“It is frustrating because to get $255 you got to pay back $300, and you never received $300,” she lamented.
But Ninda said she had nowhere else to go when family members needed help. “The banks are just as bad, they don’t want to give you a loan, period,” she complained. “It’s like you have no other choice. You’re damned if youdo, you’re damned if you don’t.”
Unfortunately these folks are in economic dire straits,often uninformed as to usary , and have limited options. All too often there are shady people and business that are more than willing to take advantage of the situation and the person in need………
We need to get back to fiscal conservatism to not only strengthen the economy but to strengthen the dollar, then we will have plenty of mo0ney for these options
Because of the reasons stated in your article are reasons why payday loans can be a good thing. However, one must be responsible about them because they can get out of hand. As the woman interviewed said, where else can they get a loan? They can’t go to the bank and payday loan establishments offer these folks a way to pay their other costs.