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Easy cash, hard reality

Payday loan stores fill a need - but their rates are sky-high

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There's Check City. And Money Mart. And Easy Money and The Cash Store. Driving along State Street, it almost seems as if there is a "payday loan" business on every corner.

But why have these places been springing up like mushrooms? Who keeps them in business? Probably just poor people, right? People who have low-paying jobs and are desperate for cash? People willing to pay sky-high interest rates because they have no other options?

Well, maybe. But then again, maybe not.

According to a new study commissioned by the Utah Consumer Lending Association (UCLA), which represents about 80 percent of the state's payday loan operators, the average household income of their customers is $41,000. About 40 percent of them are homeowners. Many have at least some college education.

In other words, industry representatives say, they are people like Terry Schlabaugh. The 30-year-old Magna resident is a high school graduate who has completed some college and technical school. He has worked at Packaging Corp. of America for about seven years.

And he has taken out a few payday loans.

"Everybody kind of overextends himself sometime, and it's a quick way to catch up on bills or whatever," Schlabaugh said. "It's fast and convenient, and there's not a lot of hassle to it."

Or they are like Rose Percell. The 50-year-old Salt Lake resident is a high school graduate who also attended the University of Utah. She works at Equity Title, and she has used payday loans about four times in the past year.

"I refinanced my house six months ago, and I got rid of all my credit cards," Percell said. "This works for me because it's not a long-term thing. . . . It's good when you get in a bind or are short on cash."

In a typical payday loan — sometimes known as a cash advance loan or postdated check loan — a consumer writes a personal check for, say, $120 to borrow $100 for two weeks, or "until payday." At the end of the two-week period, the consumer can redeem the check with cash, let the check be deposited by the payday loan business or extend the loan by paying another fee.

Schlabaugh said he found out about such businesses when he went to Check City to have his income taxes done. When work was slow one week, he decided to try a payday loan.

He received information indicating that his loan had an annual interest rate of more than 300 percent. But he said he saw it more as a one-time fee.

"I've told a couple people about it, just because if they're in a position where they're going to bounce a bunch of checks, it's actually cheaper to get a postdated check loan and not hurt your credit rating," Schlabaugh said. "It's a last-option thing. . . .

"It helps if you use it right. I wouldn't say you should get a check loan to take it out to Wendover to try to make money."

Jean Ann Fox, director of consumer protection for the Consumer Federation of America, said the problem is many people do not "use it right." And, she said, all customers of payday loan businesses are paying exorbitant interest rates.

"Payday loan customers are not the poorest of the poor, because they have to have a source of income and an open bank account," Fox said. "These tend to be low- to moderate-income consumers who don't have much in the way of savings and are probably stretched on their credit options.

"It's the fact that these folks maybe don't have that many choices to go to that makes them deserving of some level of consumer protection."

Richard Rawle is president of the UCLA and of Check City, which has six operations in Utah, four in Las Vegas and seven in Virginia and Maryland. He said the UCLA commissioned its survey, at the urging of the Utah Department of Financial Institutions, to answer some of the questions about who uses payday loans and whether they are satisfied with the industry.

Kip Cashmore, owner of Utah-based USA Cash Services, said he also hoped the survey would do away with some misconceptions. "We wanted the facts in an independent study," he said. "Yes, we commissioned it. But we had no control over it. The results are the results."

Questions on the survey, which was conducted by Salt Lake's Io Data Corp., were answered by 400 Utahns who recently had obtained a payday advance loan, based on a pool of customers provided by several of the UCLA's members. Io Data said the results of the survey have a margin of error of 5 percent.

Among those surveyed, 88 percent said they felt payday loan companies provide a useful service. Sixty-seven percent of survey respondents said they were satisfied with their most recent payday loan experience, and 79 percent said they were given information on the interest rate they would be paying when they received their advance.

Cashmore said those results show that a law passed by the 1999 Legislature that requires posting of fees and limits loan renewals, or rollovers, to 12 weeks is working.

"One of the things that surprised me was, I knew we had a high satisfaction rate with customers, but I had no idea we would have a 90 percent satisfied or neutral rating . . . ," he said.

"We know what our customer base is. We know their income. . . . We knew that the income was much greater than some of the people who try to put the industry down try to propose it to be."

Tracy Rawle, Richard Rawle's son and vice president of Check City, said the survey also shows that people who use payday loans know how much they are paying. Richard Rawle said that, at Check City, the fee amounts to about $8 per week per $100 loaned.

"They're not the poor," Tracy Rawle said. "They're just an individual or individuals who need to get past a little critical time now and then."

Fox said the question the survey did not ask was whether people who received interest-rate information really understood what it meant.

"That helps you judge whether it is a good idea to do this," she said.

Percell said she saw the posted percentage rate information, but she also looks at the payday loan charge as more of a fee.

"Anybody who's going to lend you money, they're going to charge you a fee for it," she said. "The banks do. My mortgage company does. They have to make their money somehow."

Fox also questioned the survey findings in which a majority said their most recent payday advance was new, not a renewal. When asked how long their loan had been outstanding, 47 percent said three weeks or more.

What the survey also did not ask, Fox said, was how many different lenders respondents were dealing with at the same time. Or whether people who paid off one loan immediately turned around and took out another.

"These questions don't adequately paint the picture of the total debt load that payday loan customers in Utah may have . . . ," Fox said. "One of the real policy concerns is, are we really creating long-term, very high-priced credit for people who, according to this study, are somewhat lower income, younger, more credit-impaired than the general public?">

Richard Rawle said Check City has "a small percentage of customers who bump into" rollover problems, and Tracy Rawle said the company supported Utah's limit on rollovers. "We want to make it a short-term transaction, not an unlimited debt," he said.

Only 17 percent of survey respondents said the government should make it harder to get payday advances by limiting how many a customer can receive during a year, and only 19 percent favored government regulation on how many advances a customer can get in a row. When asked whether the government should limit fees that payday advance companies charge, 46 percent said no, but 30 percent said yes and 20 percent were neutral.

Fox said she found it interesting that fewer than half of the respondents to that question said no.

"Obviously, there is a need for small loans," she said. "There has been since time immemorial. The trick is to provide a level of consumer protection that really protects people who are needy borrowers, who don't have perfect credit, who have financial emergencies and who don't have a lot of bargaining power. . . .

"We question the appropriateness of a credit system that's built on encouraging consumers to write checks without money in the bank to cover them with the hopes that on the next payday they'll have the money there to repay the loan."

Schlabaugh, the occasional payday loan user, said he agrees that some limits should be placed on how much the businesses can charge.

"Otherwise, it's basically like legal loan-sharking," he said. "I'm sure there are some people that go from place to place to place and keep getting loans, and they're going to dig themselves further in debt."

But Richard Rawle said fierce competition in the industry keeps rates low without government intervention.

"The growth in the state of Utah with regard to this industry has really matured," he said. "In fact, two national companies have closed their doors because they couldn't make any money in Utah."

Ed Leary, commissioner of the state Department of Financial Institutions, said the number of payday loan businesses in the state has increased from about 160 to about 260 in the last 2 1/2 years. However, he agreed that the growth seems to be tapering off.

"As far as an industry to regulate, they have been very good," he said. "We had a couple of meetings right at the beginning when the law was passed outlining what the department of examiners would do. . . . (State) supervisors report they've been very compliant."

He said the department probably receives fewer than 10 complaints a year about the industry.

Fox said payday loan customers typically do not complain, either because they are not aware of industry rules or think they will not be able to get future loans if they raise a fuss.

But Rawles and Cashmore said their customers are not complaining because they are satisfied with the service.

"This service could not be offered at a very low fee. It's a risky transaction," Tracy Rawle said.

"We know we give a good service. It's a fair service for the price, and the proof of that is the fact that the consumer votes with their feet."

Leary said it appears that Utahns are aware of the costs of payday loans and are still choosing to use them.

"The general advice (I would give) would always be to look to where they can obtain the service for the least cost," he said. "This (payday lender) is not the least cost out there. There are other financial institutions out there. But most people said they go to payday lenders for convenience. People believe the costs for returned check charges quickly add up far more than taking out a payday loan, so it's actually good business sense on their part to do it."

Percell said taking out a payday loan also can be less embarrassing than other options.

"I take pride in how I work and how I earn my money," she said. "If I get in a bind, I don't have any family. I don't have anybody I can call and say, 'Hey, can you lend me $20?' (A payday loan) works out better for me."

E-mail: gkratz@desnews.com