Payday lending booms in state

Short-term loans at high rates reached $500 million in '05

David Milstead, Rocky Mountain News

Tuesday, September 26, 2006

Payday lending - short-term loans at high interest rates - is skyrocketing in Colorado.

There were $500 million in payday loans made in 2005, a 34 percent increase from 2004. The amount of lending has doubled since 2002.

Payday, or "deferred presentment" loans, are loans for up to $500 for 40 days or less, due on the borrower's next payday. In Colorado, they're regulated by the office of Attorney General John Suthers, which compiled the numbers.

The maximum finance charge allowed for a $500 loan in Colorado is $75. Combine that amount with the short-term nature of the loans, and the interest rates can be eye-popping. The average Colorado loan in 2005 was slightly more than $300 to be repaid in 18 days with an average annual percentage rate of 345 percent.

The latest gains continue the long-term expansion of the payday lending industry. According to Paul Chessin, an assistant attorney general who authored a report on the industry early this year, total payday loan volume in 1996 was $34 million, growing to $106 million in 2000.

After a state law that clarified the industry's regulation passed that year, however, "growth has been nothing short of explosive," Chessin wrote. Loans increased to $180 million in 2001 and doubled by 2004, when they totaled $368 million.

Whether all this growth is good news is a matter of debate.

Opponents of "predatory lending" are quick to condemn payday loans, saying many of the customers are frequently unable to pay them back, starting a vicious cycle.

"This is a whole industry, like the tobacco industry, predicated on making a profit off human misery," said Mike Flagg, a spokesman for the Center for Responsible Lending. "In one case, it's nicotine; in the other, it's easy credit."

The industry, however, says its customers compare the cost of the loans with other fees that could exceed their cost.

"They view the payday option as a cost-competitive alternative to bounced-check fees, credit-card late fees or overdraft protection fees," said Jamie Fulmer, a spokesman for Advance America, a Spartanburg, S.C.-based lender that has more than three dozen locations in and around Denver.

In Colorado, Advance America charges $40 for a two-day loan, less than what a customer would face with the combination of a $32 overdraft charge and a merchant returned-check fee of $25 to $30.

The payday industry - represented by a trade group called the Community Financial Services Association of America - is trying to combat the idea that the industry preys on the poor by releasing a profile that says its customers are the "heart of the working middle class." The group says 77 percent have incomes topping $25,000.

Chessin's report found the median gross income of Colorado borrowers in 2004 was $26,040. Those who earned $30,000 or less took out 62.9 percent of the loans.

Outside Cash Payday Express on Stout Street on Monday afternoon, two men talked about both sides of the issue.

Mike Flynn, 38, said he has three outstanding payday loans totaling $850, two of which are in default. One has an annual percentage rate of 575 percent.

Flynn relies on a disability check and admits, "I have more outgo than income. I like to spend money - who doesn't?"

"I'm not happy I have them - the added debt does stress me out," he said. But when compared with bounced-check charges, "if you're doing small amounts, payday loans are the better way. It's a good option to have when it's the first of the month and you ain't got your rent."

But Flynn's friend, Matthew Smith, who accompanied him to the lender, said watching his mother struggle with payday loans "made me realize I ain't ever going to do it - it costs too much. They trap you."

Critics of payday loans focus on the problems of the lenders' best customers. Suthers' report found almost 15 percent of the borrowers in 2005 had 13 or more payday loans, which he says means they were in debt for at least six months of the year.

Sara Allen, executive director of Consumer Credit Counseling Service of Northern Colorado, said many of its customers have multiple payday loans. "They took one out to fix the car or pay rent, but then when payday comes, they can't pay it."

"We need to do a better job of educating people not to do that to themselves," she said. "But who am I to put myself in the shoes of another person, perhaps with sick children at home?"