Mary Love says she “got caught in the trap” a decade ago when she needed help to pay the rent on her apartment.
Love borrowed $200 in cash from an Advance America payday loan store down the street from where she worked at the UPS logistics call center in Louisville. In exchange, she gave the store a personal check for $215, covering the loan principal plus a $15 fee. She was required to return in two weeks with $215 in cash or else Advance America would attempt to cash her check.
“But two weeks later, I still had some other things I needed to catch up on, so I took out another loan, this time for $400,” said Love, now 71 and living in Oldham County. “In two weeks, I had to pay back $430. And it just kept going. I never caught up. For two years, I never caught up enough to pay them back enough to not have to get another loan. I probably paid them $1,400 in interest over those two years in order to keep borrowing that $400.”
“Once you get stuck in that cycle, it’s very, very difficult to get out,” said Love, who ultimately turned to credit counselors to restructure her debts and work out payment plans with her creditors, including Advance America.
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Jamie Fulmer, a senior vice president at Advance America, based in Spartanburg, S.C., said his company provides a necessary financial service and obeys the laws of every state in which its stores operate.
“We take it extremely seriously,” Fulmer said.
Payday loan stores emerged in the 1990s as a quick source of cash for people who felt they could not turn to banks or credit unions. Some customers were poor and had bad credit histories. Others just wanted a smaller loan than most traditional lenders offered. But fast cash came at a high price. Annual interest rates on payday loans can exceed 400 percent in Kentucky, far beyond anything a bank or even a credit card company would charge their borrowers.
Many people who walk into a payday loan store live on the edge of financial disaster, said Anne Marie Regan, senior staff attorney at the Kentucky Equal Justice Center in Louisville.
“These are people who don’t have any money to fall back on,” Regan said. “Their car needs repairs or they need to pay their rent, and they just don’t have the money. But the reality is, if they don’t have the money today, they’re probably not going to have the money, plus extra to pay the fees on top of the principal, in two weeks. It’s a very bad product. It just is.”
2.1 million The number of payday loan transactions in Kentucky last year, for a total of $717 million borrowed and $117 million in fees, according to a statewide database.
Charles Vice, who is responsible for regulating payday lenders as Kentucky’s commissioner of financial institutions, said “there is a demand” for the stores.
“There are customers out there that want this type of service and are willing to pay the rate for it. It is a credit market that a lot of companies have left. A lot of banks and credit unions will not lend in this type of space, meaning below a certain dollar amount,” Vice said. “So this is a type of credit that does serve a certain market.”
Would he ever take out a payday loan?
“Me personally? No,” he said.
There were 2.1 million payday loan transactions in Kentucky last year, for a total of $717 million borrowed and $117 million in fees, according to a statewide database.
Once they get involved with payday lenders, borrowers like Love can find it hard to free themselves. The average borrower in 2015 took out nearly 11 loans for a total cash advance of $3,606 and $591 in fees, according to the database. That average borrower had a loan outstanding for more than six months last year.
“I was a bankruptcy attorney before I was state treasurer, and I got to see firsthand how payday lending, if it’s done — well, it’s often done in a way that’s harmful to people,” said Kentucky state Treasurer Allison Ball. “I just saw a vicious cycle of people getting involved and not being able to get out of it again, hidden fees, undisclosed fees. I saw interest where it wasn’t really disclosed and it was incredibly burdensome.”
Ball said she is preparing a list of initiatives to protect borrowers. But such efforts usually fail in the General Assembly, which annually ignores bills that would cap the interest rate on payday loans at 36 percent. That’s the interest cap imposed by the U.S. Department of Defense on anyone loaning money to an active-duty military family.
The last restrictions passed on Kentucky’s payday loan industry, in the late 2000s, limited borrowers to either $500 or two loans at any given time. A statewide payday loan database was created to track borrowers and their outstanding loans. In theory, nobody can obtain a new payday loan until the database determines that they’re eligible. In fact, payday lenders frequently are cited for entering inaccurate information about borrowers and their loan status, allowing more debt to be awarded than the law allows.
In Washington, the Consumer Financial Protection Bureau last month proposed new federal rules that would force “drastic changes” in how payday lenders operate, as Moody’s Investors Service described it. Among those changes, lenders would have to take into greater account a borrower’s ability to repay before approving a loan. If enacted, the new rules would “take a significant toll on the profitability of payday lenders,” Moody’s said.
Such changes would make small loans less attractive to lenders, said Vice, Kentucky’s financial regulator.
“You’re gonna have — as that rule is instituted into small-dollar lending — you’re just gonna see the amount that someone is willing to lend go up,” Vice said. “Simply because if I’ve got to do an ability-to-pay calculation on you, there’s certain overhead associated with that. So to cover that, I’ve either got to have one of two things. I’ve got to have more interest rate for the risk I’m taking. Or I’ve got to have a higher loan dollar volume.”
Love, who retired as a Presbyterian minister in Louisville before she went to work for UPS, said she initially was ashamed to talk about her payday loan debts. Then, as she studied how the industry operates, she realized thousands of other Kentuckians shared her predicament, she said. Potential borrowers need to be warned, she said.
“You don’t have to be dead broke to get caught in the trap,” Love said. “I think everyone assumes it’s just deadbeats who get caught. Well, maybe I was a deadbeat, but I was a deadbeat who was working and making $35,000 a year when I got caught in it. And then I just did not see a way out for a long time.”