Loan sharks. It's a term that conjures images of dark alleys, broken kneecaps, and the heyday of organized crime. But in some corners, it's being applied to people who register with the government, sit behind desks, and work at publicly traded companies.
As the economy limps back from the recession, much of the analysis has focused on how much the redefined American consumer will use credit cards or visit retail stores. But behind the scenes, a far more rudimentary debate has been playing out: How can low- and middle-income workers get access to short-term loans?
It's a debate that has been infused with an almost theatrical level of vitriol from the opposing sides. And much of it has been centered around payday lenders. These businesses offer loans that are essentially advances on paychecks. Recipients typically are workers who need immediate access to small amounts of cash.
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Consumer protection groups have compared the lenders to loan sharks and called their products abusive and predatory. "Payday [lending] just strips money out of the scarce resources of families that live paycheck to paycheck," says Jean Ann Fox, the director of consumer protection for the Consumer Federation of America.
But Steven Schlein, a spokesperson for the Community Financial Services Association of America, which serves as the trade group for payday lenders, charges that organizations like Fox's were launching a "jihad" against his industry. "They don't believe that the private sector should have financial interactions with working people. All their solutions are government and charity," he says.
Payday loans have been the subject of repeated regulatory disputes. To date, 15 states and the District of Columbia have imposed restrictions on the practice.
Here's how the industry works: At payday lending centers (examples include Advance America and ACE Cash Express) throughout the country, workers can come in and take out loans. Typically, interest is between $15 and $17 per $100 borrowed. Loan recipients agree to pay back the money when they receive their next paycheck.
But in the aftermath of a recession that chipped away at working-class Americans' resources, many have found it increasingly difficult to make good on their loans. And in this climate, questions about interest rates and so-called debt traps have taken on increased urgency.
One of the most common charges levied against the payday lending industry is that it is designed to trap workers in a vicious cycle. The Center for Responsible Lending, for example, says that the industry derives 90 percent of its revenue from repeat borrowers. "Most people don't actually default until they've repaid payday loans several times," says Leslie Parrish, a senior researcher at the CRL. "Because your payday loan is timed to your payday, you have the money that day. You don't have enough money for your other needs for the rest of the pay period, but you'll have the money that day."
"People get paid, they run down to the payday loan store, and they pay off their loan," says Fox. "And then a lot of them immediately take out a new loan because they do not have enough money in their pocket to make it through the end of the next pay period."
Schlein labels these charges a myth. He notes that all of the CFSA's member organizations (which together account for 60 percent of the industry) offer borrowers extended payment plans. "This whole cycle-of-debt thing is really [just] theoretical," he says.
Another bone of contention has been the interest rates that payday lenders charge. The average duration of a payday loan is two weeks, but interest rates are generally expressed in terms of an annual percentage rate. For a two-week loan that has $15 in interest charges for every $100 borrowed, the APR is 390 percent. That's the number that opponents of payday lending tend to cite. "We think that it's a predatory [practice] and that consumers should be protected from 400 percent interest," says Fox.