The Garden City Telegram
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Payday loans have benefits, risks
Published 1/25/2008 in News : Area coverage
By RACHEL DAVIS
rdavis@gctelegram.com
Judy Killion of Garden City said she wanted to pay her electric bill so she wouldn't be left in the dark.
Her daughter, Amber Zahnter, also of Garden City, said she wanted to pay rent and utilities but was having a hard time meeting those obligations.
Neither said they expected a loan from a payday or auto title lender would lead them further into debt.
Killion said her problems began in 2000 when she was living in a trailer at Meadow Lark. Her electric bill was higher than normal -- $300 -- and she didn't have the money. Friends told her about payday loans.
Killion borrowed $200 from Check Into Cash, which now does business as Ace Express, and a $100 loan from Money Lenders, which is no longer in business.
She said the lenders explained the contract to her and answered her questions regarding the loan, but she wasn't aware of late fees and the companies didn't mention them.
Calls to the corporate offices of Ace Cash Express, located in Irving, Texas, were not returned.
Killion said when she got paid, she owed $300 on the loans, $45 in loan fees, but, because she didn't make her payment on time, she faced an additional $75 charge. In order to make ends meet, she had to take out another payday loan. The borrow-pay-borrow cycle lasted about a year, she said, and the $300 she initially needed ended up costing her about $2,000.
Tim Hagan, director of education for the Wichita office of Consumer Credit Counseling Service, said Killion's situation is not uncommon because people who use payday loan services don't realize the fees and interest rates attached to the loans.
Hagan said the payday lending industry is successful because it markets itself through television commercials that make payday lending look like a common practice.
Hagan said payday lenders in Kansas can make loans up to $500 per loan to anyone who can demonstrate a source of income.
"It sounds so easy," he said. "No credit checks. Anyone can get one. Just come in and sign a contract."
But some people don't realize that when they borrow $500, they're going to owe $575 because of the 15 percent interest charge.
"Basically you're paying $75 every two weeks to borrow $500," Hagan said.
Those who get caught in a cycle like Killion did, end up paying much higher interest rates on extended loans -- up to 391.07 percent for a 14-day loan, Hagan said.
At that rate, those who borrow $500 and extend it would have to pay $770.50 after interest and fees.
Depending on the contract, a borrower may have seven to 30 days to pay off a loan but, typically, a two-week loan is the standard time frame, Hagan said, He said he doesn't believe payday lenders take into account the borrower's ability to repay the loan in a short time frame.
But Lyndsey Medsker, a spokeswoman for Community Financial Services Association of America, which, according to its Web site, promotes responsible regulation of the payday loan industry and consumer protection, said payday lenders are businesses and "businesses don't loan money to people who can't pay them back."
Medsker said her association has business members that must pay a membership fee and agree to post educational materials in its facility, as well as provide payment plans for customers. Its Web site also lists guidelines for its members to promote ethical practices.
However, of the 1,700 licensed payday lenders in Kansas, only 150 belong to the association, according to Medsker. None of the payday loan businesses in Garden City are listed on the association's Web site.
State Rep. Jeff Whitham, R-Garden City, who is also CEO of Western State Bank in Garden City, said while the payday loan industry might have gotten a black eye in recent news reports, consumers ultimately must take responsibility for their financial decisions.
He said borrowers should ask questions about the contract and make sure they understand all of the terms of the loan before signing it.
Whitham said payday lenders are necessary because people with no credit or poor credit are reluctant to do business at commercial banks, and banks are reluctant to do small, unsecured loans because it's too expensive for the bank.
However, some banks, like Security Savings Bank, Commerce Bank and Bank of America in Garden City, do offer loans starting at $500. Depending on a person's credit history, these bank loans may carry interest rates ranging from 8.99 percent to 24.99 percent.
When comparing a $500 bank loan with one month to pay it off at 15 percent interest, the borrower would pay $506.25 -- about $69 cheaper than a payday loan.
Hagan said in Kansas, payday lenders, regulated through the Office of the State Bank Commissioner, aren't limited as to the number of times a loan can be rewritten because each time it's rewritten it is considered to be a new loan.
J.P. Arellano, vice president of consumer loans at Western State Bank, said payday lenders are not held to the same standards as bank loan officers, who are required to go through each step of the contract, answering questions or addressing concerns throughout the process. Loan officers arrange payment plans and discuss interest rates for secured and unsecured loans, and if they fail to, they could face state and federal penalties.
With payday lenders, they can choose to educate the borrower about the risks of taking out a loan or have them sign the contract and send them on their way, Hagan said.
For more information about payday and auto title lending, contact the Consumer Protection Division at (785) 296-3751 or (800) 432-2310.
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