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Payday loan users say they have no options, study says

June 29, 2009 | | Comments Comments

FRANKFORT — A survey of low-income families in nine Kentucky counties showed that many turned to payday lenders because they couldn’t access or didn’t trust banking services.

That’s one of the findings released Monday from a Kentucky Youth Advocates 2008 survey of families and their financial needs. Fifty-two people in Boyle, Campbell, Christian, Jefferson, Kenton, McCracken, Mason, Pulaski and Warren counties participated in focus groups and interviews over three months in 2008.

The 2008 survey is a follow-up to a 2007 Kentucky Youth Advocates and Brookings Institution study that showed that a quarter of low-income Kentucky families did not have a bank account. More low-income families also used high-cost check cashing services —approximately 31 percent — compared to high income families — 5 percent.

The most recent study looked at real-life experiences of low-income families.

Short-term lending services provide immediate cash but often charge high interest rates. Some studies show that Kentuckians pay $131 million a year in fees to payday lenders.

“Working families are struggling now, more than ever, to get food on the table and to make ends meet,” said Terry Brooks, executive director of Kentucky Youth Advocates. “When economic times are rough, Kentuckians are forced to find immediate cash, and unfortunately many find it where the costs and consequences are high.”

Steven Schlein, a spokesman for the Community Financial Services Association of America, a short-term lending trade group, said the survey does not adequately reflect the experiences of most payday loan users.

“We have tens of thousands of customers in Kentucky and very few complaints,” Schlein said.

The survey found that many families didn’t realize how much interest they were paying on the loans. Some interest rates can be as much as 400 percent on an annual basis.

Some said they turned to payday lenders only after traditional banks refused to help because of their poor credit histories. Others said they had to take out multiple pay-day loans to pay off the first loan, keeping them in a cycle of debt.

Many of the participants also said they were distrustful of all financial institutions because of fees associated with banking.

The report suggests Kentucky create alternatives to payday loans, such as the “Save It! Loan” program run by the Mountain Association for Community Economic Development and the Appalachian Federal Credit Union. The program offers 10-month loans with a cash savings account.

Other recommendations include using churches to increase finance literacy and encouraging banks and the government to reach those who are mistrustful of banks. The report also calls for a cap on payday loan interest rates.

But Schlein said the survey found that many people go to payday lenders because traditional financial services won’t serve them. A 36 percent cap on interest — which has been proposed — on payday loans would shut down many short-term loan operations, leaving people with no options, he said.

“They are contradicting themselves,” Schlein said.

During the 2009 General Assembly, Kentucky Youth Advocates and others pushed for a cap on payday loans but that legislation failed to gain traction. Another bill, which would create a database of loans, did pass the General Assembly. The new law also includes a provision that places a 10-year moratorium on new payday lenders.

Brooks and others said the bill didn’t go far enough to curtail payday lending practices.

Gov. Steve Beshear said in March that he would support an interest rate cap on payday loans and has said he will work with advocates during the 2010 session to get legislation passed.

Filed Under: FeaturedState GovernmentSteve Beshear

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Comments

  1. JH says:

    Sad that our banking industry only works for those who don’t need the funds.

  2. Anonymous Volunteer says:

    Not surprisingly, the group hating the payday loan industry conducted a study that did nothing but reaffirm their beliefs. How convenient, since they are being funded by the direct competitors of payday lenders.

    Is this really a pressing issue for children? After all, that’s who they claim to represent.

    Make sure you read the study carefully. The people used in the study would only participate anonymously and are referred to as “volunteers”, but they were compensated for their participation.

  3. agniscrazy says:

    Beshear’s mafia operations need to be banned from our state.
    Taking advantage of the already stressed families is shameful and to think the leader of our state represented these snakes and was a part of the shakedown of the poor is reprehensible. He and these mafia dons need to be escorted to the state line and be banned from ever setting for in our state for any reason.

  4. Wait, saving money instead of borrowing at an outrageous APR isn’t an option? Sorry, I’ve been in their situation but never resorted to using predatory pay-day lenders. For every individual that complains about the glories of these lenders, their situation can be refuted by their unwillingness to save and/or cut back on non-essential services (e.g. cable television).

  5. Caught in the cycle says:

    Sherman, I understand cutbacks at home must be made but tell that to someone who was already behind on a car payment or such. Sure I could try to predict the future of what unfortunate event may happen where I need money quick. In most cases, ppl rely on these places due to something at he last minute they had to have and dont have the regular income to make it.

    I’m working 2 jobs just to get myself out of this situation. I have a few check loans out right now. I’m to the point where I just may not go back and let them all bounce so I can make payments to pay off instead of going back every 2 weeks. Basically, you’re just renting to not have your bank account go in the red.

    I do belive ppl must work hard, cut unimportant expenses and costs and save. But if you have a single parent who may have hrs cut back. This is their only option. One time I did a loan, didnt have enough to renew since my car was about to get repossessed and when the payday loan called to see why i was late and i explained, her expression was “so they’re going to get their money for I get mine?!!! Obviously I need my car to get to work out of town

    I suggest that these companies be in a position where their customers come to borrow from them and then have a payment plan to work their balance down. I’m trying to get out of the cycle. Its very hard. I’ve consider even a 3rd job. So thats more times my kids dont see me. I’m trying to do this honestly and legal instead of referring to criminal actions such as drugs,robbery or bulgary.

    Alot of Americans are in a financial position they never could imagine would happen to them if the were never raised by parents who struggle. I just know when i see a soccer mom pulling up in a Lexus Suz going to the payday loan…. I know then that times are tough.

  6. Jackson Strain says:

    Consumers did not “lose” fees to payday lenders. They PAID fees IN EXCHANGE FOR short-term credit.

  7. Interesting says:

    Borrow $200, pay back $203? Hardly “predatory” if you ask me.

  8. Jim Anderson Stivers says:

    PAY DAY LENDERS!

    WHOSE YO DADDY?

    WHO GOT #100 K FOR REPRESENTING THE PAY DAY FOKES, SO MANY MONTHS, YEARS AGO?

  9. John says:

    I appreciate that fact that so many here want to protect the public from what they perceive is their own stupidity. However, in my experience, most of the people who are outraged over payday lending have absolutely no clue about the product, or why people use it.
    As an example, did you realize that a payday loan is a two-week, or a month termed loan, and that applying an annual percentage rate to this product is misleading? (Bounced check fees for example-a much more costly form of credit yield APRs that can climb into the thousans of percent if treated in the same fashion).
    Did you also know that the cost of credit for one of these loans can be far less than a single bounced check fee, or the cost of a credit card APR increase? Did you know that the primary anti-payday lending lobby in this country (Citizens for Responsible Lending-which provides much of the “statistics” for lazy reporters) was largely funded by bankers that peddled the most pernicious types of mortgages (REVERSE amortization mortgages)! Did you know that most users of payday lending are very happy with the product, and extremely happy that that have SOMEWHERE to turn when they have an emergency, even though they may have a spotty credit history? Most users of the product have absolutely no other more cost-effective alternatives, but would-be do-gooders think these consumers are simply not-thinking fools that need to be protected from themselves. In fact, nothing could be further from the truth. These are rational people who absolutely know the cost of the credit they are attempting to secure, and who are making cost-effective choices for themselves-happily. Are there people who abuse this product? Of course. Should we therefore eliminate the choice for the vast majority who use it responsibly? Then why not eliminate all credit that can be abused using the rationale that people are just too stupid to know better. This truly is nannyism run amok.