Tuesday, August 28, 2007

Payday Loans

Today's New York Times has an article about payday loans, with a surprising twist: some are offered by a non-profit organization.

Payday loans have become an increasingly popular way for low-income Americans to try to make ends meet. The loans are often for relatively small amounts, and short periods of time, but the interest can be incredibly high, amounting to over 500% in terms of an annual rate.

Peggy Truckey, 53, knows the allure. Last year she owed nearly $1,300 to four of those stores, and was paying about $600 a month in finance fees alone. “I thought I was going to have to take a second job just to pay off the interest,” Ms. Truckey said.

Then she heard about a new nonprofit program operated out of a Goodwill thrift store, one of several hundred lower-cost payday loan products that are now being tried by credit unions around the country. She got a payday loan, at half the finance charge, but also something more: help converting all her two-week payday debts, which charged the equivalent of more than 500 percent annual interest, to a one-year loan at 18.9 percent, bringing her monthly payments down to a manageable $129. A few dollars from each payment go into a savings account, the first she has had in years.

“I have almost $100 in savings,” said Ms. Truckey, who earns $9.50 an hour as a supermarket meat clerk. “I’m in a comfortable position for the first time in many years.”

Not everyone approves of what GoodMoney is doing-- their non-profit payday loans may have lower interest rates, but "lower" may mean "only" 200% instead of 500%-- still tough for a low-income person to manage. And some think that these loans just reinforce a kind of behavior that should be avoided entirely. But for people at near-poverty level, there may not always be other options, and their situation can go from bad to worse in no time:

Dan and Julie McGrath cannot say whether the program would have helped them. Three years ago they took a $150 payday loan to follow Mrs. McGrath’s daughter to an out-of-area basketball game. Before long they had loans at five payday stores, and some $2,000 a month, about two-thirds of Mr. McGrath’s income, was going to finance charges.

On a recent evening, the couple huddled outside a weathered 22-foot trailer on property owned by Mrs. McGrath’s parents 90 minutes away near the Michigan border. Since the couple lost their house, this has been their home. It has no hot water or working toilet. In moving, they gave up custody of Mrs. McGrath’s teenage children.

Recalling the way the loans had piled up, Mr. McGrath, a 41-year-old maintenance mechanic, said: “We thought, ‘O.K., we can get this one over here and pay off these others.’ But it never works out. I’d need a set of tires for the car: back you go.”


Kevin Surbaugh said...

wow, very interesting article. I wish I had seen the article in the Times. It is interesting that the article appeared the same day I wrote my own post on these scum bags, on my own blog.

Ms. M&P said...

I can't believe that there are nonprofits charging that kind of interest. They get tons of tax breaks for being a nonprofit. How gross. There has to be a better way to help people out. When someone's income is so low that they need a payday loan, any interest at a all is going to throw them deeper into a hole.

Anonymous said...

In a perfect world, everyone would have money in savings to cover unexpected expenses as they come up, but that's not the world we live in.

The Goodwill is offering a product for no profit and you still think it's too expensive...I'd challenge everyone to find a way to lend $100 for less than $9.90 for a two week period. The demand is obviously there.

For what it's worth, payday lenders typically charge $15 per $100.

Either way, for people who have to pay a bill today but don't get paid for a week, they are facing bounced check fees, late payments, etc. A payday loan is cheaper than all of those options.

Anonymous said...

As pointed out, many people do live from paycheck to paycheck, and for these people, payday loans can be a great help when they are used responsibly. If you compare actual costs, a payday loan is much less expensive than many of the other options available. Since these loans are only for a short time period (usually about 2 weeks), the use of an APR is very misleading. For example, when comparing the cost of a $200 payday loan – approximately $30 – to the cost of a late credit card payment (approximately $37) or a bounced check (NSF plus merchants fee average around $54), often a payday advance is the best alternative. Also take into consideration that the average bank overdraft charge is $26.90 per check, regardless of how much that check is for!

It is true that some people do not use payday loans responsibly, which can lead to financial trouble, but isn’t it also true with every financial product available today from credit cards to home loans? It wouldn’t be right to eliminate credit cards because some people abuse them just as it would not be right to take away the option of payday loans from the millions of people who use and rely on them.