CBS News Investigation

CBS News: Short-Term Loans Can Mean
Lasting Trouble
Payday Advance Loans Seem Simple, But Can Lead to
Cycle of Debt

July 28, 2008
(CBS) In the current state of the economy, about 2,600 Americans a day file for bankruptcy. Others are turning to a financial quick fix called "payday loans." They've now grown into a $59 billion industry. But six states - Arkansas, Georgia, New Hampshire, North Carolina, Ohio and Oregon as well as the District of Columbia - have now effectively banned these loans, and CBS News chief investigative correspondent Armen Keteyian looks at why.

Today there are 24,000 payday lending stores in America - more than Starbucks and McDonald's combined. They provide 19 million American households a quick way to make ends meet.

"Please borrow only what you feel comfortable paying back," says a video by the lending industry.

A typical customer takes out about eight payday loans a year - in essence, an advance on their paycheck - with rates as high as 20 percent, Keteyian reports.

For lower- and middle-class families with few financial options, such loans - even at that price - are a godsend.

But folks like Mary Bates now see something else - a short-term solution turned long-term trap.

"An endless cycle; a dead end," Bates said. "I would advise anyone not to."

For Bates it all began with a $400 payday loan - plus $70 interest - to fix her car. But after paying it off two weeks later, she couldn't afford to live on what was left.

So she took out another loan, starting a two-year cycle with a variety of payday lenders that ended up costing this single mother of two what she says was more than $1,500 in interest to essentially "float" a $400 loan.

"They are set for people like me, that live payday to payday. And then once you're in there, you can't get out," she said.

"Fifteen to 20 minutes, you can walk out with cash in hand," said Terrence Jent, one of eight former industry employees who spoke with CBS News.

A former regional manager, Jent says payday lenders train their workers to set hooks.

"Incentives that you offer to customers to get them to become repeat borrowers," Jent said.

Like "take out five loans, get the sixth one free." Or offering cash to managers of low-income buildings to refer desperate tenants.

And this document, obtained by CBS News reveals that among the targets for at least one payday lender are: "single-parent households with multiple children," who are "financially stressed."

"We had people all the time that would come in and take out a loan to pay their retainer fee on their lawyers to file bankruptcy," Jent said.

Looking at the industry's own Web site, we discovered that two of the customers profiled there actually declared bankruptcy - partly due to multiple loans from payday lenders.

"The service is very transparent," said Lyndsey Medsker, a spokesperson for the Community Financial Services Association. "There's no fine print; there's no hidden fees."

"Did you also know that two other people on your Web site have subsequently declared bankruptcy and they listed payday lenders as part of the reason that they were pushed over the edge?" Keteyian ask

"But I think you'd find that payday lenders would be a small percentage of whatever debt - people have when they do declare bankruptcy," Medsker said.

It's not the loan that - it's the interest on the loan that we're talking about.

"What happens without the option of taking on a payday loan? Does someone ... is it better off if they bounce a check? What would you recommend that these people do?" Medsker said.

Mary Bates knows full well what she will do the next time she's in a bind.

"I would do without electricity, water, whatever it would take until the next pay day - until I could pay," she said. "I would not do it."

It's a long-term lesson about instant cash Bates hopes others won't learn the hard way.

CBS News Part II: Payday Loan Investigation
Industry Touts Extended Payment Plan But CBS News
Finds Little Consistency

(CBS) CBS News Investigative Producer Laura Strickler wrote this story for CBSNews.com.
 
CBS News reported this week that the payday loan industry uses aggressive sales tactics to lure customers into payday loans that can trap borrowers in a revolving cycle of debt. Six states and Washington D.C. have taken steps to effectively ban the industry.
 
For those who pay off the loan with their next paycheck, a payday loan can be a boon. But some customers get stuck.
 
Here's how problems can begin: a customer needs extra money and takes out a typical $300 advance on their paycheck along with 15% interest at $45. But two weeks later when their next payday arrives and they pay off the loan, they find they cannot afford to live on what is left, so they take out another loan at $345. Over time, the $45 every two weeks adds up and customers who stay in this cycle for a year find the annual interest rate is over 300% and they have paid $1170 in interest for the original $300 loan.
 
Lyndsey Medsker, spokesperson the Community Financial Services Association (CFSA) told CBS News that in response to such criticisms, their member companies now offer extended payment plans.
 
"So any members of our association are required to offer - if you borrow $300 and two weeks later you find that you cannot pay it back, you're required to offer an extended payment plan to that customer to give them an additional eight weeks to pay it back at no charge," Medsker said.
 
CBS News called fifty payday stores across the country whose companies are members of CFSA to ask if they offered an extended payment plan.
 
Employees at thirty stores told us they do not offer an extended payment plan.
 
A Check 'n Go store employee in Woodbridge, Virginia told CBS News, "No, you have to come in and take out the loan and pay it in full." At a Dallas Check â€ËÅ"n Go, extended payment plans are "never in the stores, but you can online."
 
One Advance America employee in Bastrop, Texas said, "No, the way it works here is I'm not supposed to discuss this over the phone. I'm supposed to try and get you to come in the store."
 
The Advance America website states: "If a customer is unable to pay back an advance within the arranged timeframe, Advance America offers an Extended Payment Plan to allow customers a longer time period to repay at no additional charge."
 
But at the Advance America store in Ames, Iowa an employee said, "No, we don't really do payment plans. When you come in to take out the loan you have to sign a contract saying you're going to come in and pay the loan in full on your next payday." And in Arlington, Virginia, "No, you have to pay it back on your payday.
 
In response, Jamie Fulmer, spokesperson for Advance America told CBS News, "We don't sell extended payment plans, that is not our product, our product is a payday advance." Fulmer says every customer who takes out a loan gets a brochure that mentions the extended payment plan.
 
Check 'n Go sent CBS News their extended payment plan policy but the company says it is not posted on their Web site for their customers because, "It could be confusing and misleading to our customers," due to different state laws, "and may explain the responses your staff received from our stores."
 
Cash America says its policy is the same as the rest of the industry but would not answer questions as to why some of their employees were unaware of the policy.
 
Steve Schlein with the CFSA told CBS News, "The Extended Payment Plan is available to customers who cannot pay the loan when due, not to random callers who don't even have a loan."
 
For the 20 stores who responded that they did have an extended payment plan, most indicated customers could use it only after four consecutive loans and only once a year which in some states is the law.
 
At an Advance America in Charleston, South Carolina, "We do offer an extended payment plan, but you can only do it once a year. It's not something that we want to do. We do it, but it's better not to."
 
Some stores responded by suggesting that instead of a payment plan, the caller could just take out another loan.
 
In Charleston, South Carolina at a Check 'n Go an employee said, "You can pay it off and re-borrow the funds so that you can pay your bills, then pay the loan back the next time."
 
At a Cash America store in Tulsa, Oklahoma, "You'd need to pay it off and get another loan the next day."
 
And at another Cash America store in Houston, "You have four times to come in and renew the loan, and then by the fifth time you have to come in and pay it off."
 
Chris Widener (R), Ohio State Representative who wrote the legislation to push the industry out of his state told CBS News, "This is a product that is in fact probably predatory and addictive in some nature."