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Danielle Dinunzio
When customers do manage to pay off the loan, they frequently come back for another one. Studies show that borrowers are indebted for an average of five to seven months per year. John and his salespeople encourage that.
EXORBITANT INTEREST RATES
Low-income families and individuals pay effective annual interest rates of 456% for payday loans and 300% for title loans. The industry and the law express the interest rate as 17.5% for payday loans and 25% for title loans each loan period. Most borrowers have outstanding loans for many pay periods, and the high interest rates are not tied to the risk associated with these loans. This is especially evident with title loans, because the loan is secured by a car valued at an amount greater than the principal loan amount.
Latara Bethune, a hair stylist in Dothan, was offered almost double what she asked for at a title loan shop in her neighborhood. She hesitated, but the employee persuaded her to take the extra money. The agreement she signed required her to pay back, over 18 months, approximately $1,787 for a $400 loan.
UNLIMITED RENEWALS
When a loan quickly comes due and the borrower cannot repay the full amount, the lender can renew, or roll over, the loan, charging an additional interest payment. Lenders intend for borrowers to be unable to repay and to roll over their loans after their first payment is due.
REPAYMENT PERIOD TOO SHORT FOR MEANINGFUL OPPORTUNITY FOR ON-TIME REPAYMENT
Borrowers are required to pay back payday loans by their next pay period. Title loans are expected to be repaid within 30 days. But for borrowers using these loans to pay for routine expenses, it is frequently impossible to repay the full amount of the loan plus interest in such a short period without needing additional funds to pay their bills. Borrowers are almost never able to get ahead and pay back the principal with such high interest payments every week. Studies show that nationwide, 76% of all payday loans are taken out by borrowers who have paid off a loan within the previous two weeks.
Tiffany said lender employees were encouraged to make loans to Social Security recipients, because they made their interest payments on time and were unlikely to be able to pay back the principal. Edward*, an 89-year-old retiree in Birmingham, was a prime example. He borrowed $800 against his 1996 Buick Riviera to help out a younger relative, understanding that he would pay back a total of $1,000 with interest. But after paying $1,000 over five months, he was informed that he had only been paying the interest and still owed the original $800. Angry, he refused to pay any more, and the lender repossessed the vehicle.
NO INSTALLMENT PLANS OFFERED
Title loan lenders offer only one option for borrowers who cannot repay the full amount of their loan: rolling over the loan every 30 days. If the lender does not agree to roll the loan over, the car is repossessed.
Tiffany noted that she was not allowed to offer this program to borrowers unless they specifically requested it, and very few customers knew enough about the law to ask for such a plan. However, Tiffany noted that the few customers to whom she was able to provide this plan repaid their loan without incident. She believed this payment plan was much fairer and wished she could offer it to more borrowers to help them escape their debt.
COMMISSION PAYMENTS TO EMPLOYEES
In order to ensure that individual employees are following the profit model outlined above, lenders pay employees based on the amount of current loans outstanding, not including any loans in collections or past due. This encourages employees to persuade borrowers to take out loans with high principal values and to continue rolling over their loans when they are due. This also encourages employees to use any tactics necessary, including deception, threats and other abusive techniques, to collect the money owed.
DECEPTIVE EXPLANATIONS OF CONTRACTS, ESPECIALLY FOR TITLE LOANS
Payday lenders frequently do not explain many of the terms of the contract, including stipulations requiring borrowers to agree to mandatory arbitration and to waive their right to a jury trial in the event of a dispute. The contracts are often long and confusing to borrowers, many of whom say they have the most trouble with title loan contracts.
DIRECT ACCESS TO BANK ACCOUNTS OF PAYDAY LOAN BORROWERS
Because payday loan borrowers are required to provide lenders with a postdated check or a debit authorization, lenders have direct access to their bank accounts and can try to collect at any time after the loan term expires. Cashing these checks may result in additional fees for the borrower, including overdraft or insufficient fund fees from the bank and bad check fees from the lender of up to $30.
This highly predatory practice shows that lenders are not attempting to lend responsibly but rather are choosing to extend additional funds to consumers who have demonstrated an inability to repay a smaller loan. Lenders, in fact, target consumers who cannot afford to pay off their loans but who will do anything they can and make as many interest payments as possible to avoid losing their cars.
MANDATORY ARBITRATION
Many of the contracts for these loans contain mandatory arbitration clauses that prevent consumers from challenging the terms of these loans in court, either through individual actions or class actions.
She thought a short-term loan would provide some relief from her tight expenses. But because of her other debt, Alicia was sure no bank or credit union would lend her the money. So she went to a payday lender in her neighborhood and took out a $500 loan.
Soon afterward, Ruby and her daughter asked a lender in Dothan to buy out the loan. The store extended a new loan with a principal value of $2,218.14 to cover the principal and interest due from the first one. Ruby was sure her daughter was taking care of the payments until she got a surprise call from a lender employee who told her the total value of the loan was up to $3,000, and it needed to be paid off immediately.
Now her loans are in the hands of other companies for debt collection, and they have informed her that the amount due has increased dramatically. One company said she now owes $219 on one of her $100 loans, without explaining the charges that caused her balance to balloon by more than $100 over the $117.50 due originally.
The employee explained that Latara would owe $100 per month but did not explain how many payments she would need to make or inform her about the fees that would be charged if she were late making a payment. The reality was, if Latara paid $100 per month, the terms of the contract ensured that she would be making payments for 18 months, paying back a total of approximately $1,787 for her $400 loan.
Latara feels that she was tricked. She said the lender employees seemed sympathetic during her initial visit to the store and promised to work with her when money was tight. She is still working to pay off the loan but has started looking for another loan at a more reasonable rate to pay off the title lender and keep her car.
The salesperson there asked for minimal information and explained little about the loan terms. Cierra, who was 25 at the time, agreed to make monthly payments of $129 on a $700 loan secured by a car she had bought a few months earlier for $1,200. The employee never explained that the principal would need to be paid in full in 30 days unless the lender agreed to roll it over for another 30-day period. Rules about late and repossession fees also were never discussed.
She was then told she could get it back if she brought in the late payment. But when she arrived, the employees insisted she pay $1,000, an amount that included the remaining principal, interest and $200 repossession fee. A late fee was also accumulating daily. She had no way of obtaining the money.
EDWARD* BIRMINGHAM
Edward worked hard to secure enough money for retirement. Until he was 60, he worked for various companies around Birmingham, finding work as it was available. Once he got older, he started doing odd jobs for friends and neighbors. In the past, he was always able to make ends meet to support his large family.
Fortunately, his friend lent Edward the $1,200 need to pay off the principal, interest and repossession fee so he could get the vehicle back. That meant the lender had received a total of $2,200 for the $800 loan.
REGINALD INGRAM DOTHAN
Reginald worked hard to make a good life for himself and his family. With he and his wife both making enough money and in stable jobs, they decided to have a child.
Over the next seven months, the period in which he was unemployed, he took out a series of payday and title loans totaling $1,575, struggling to keep up with interest payments and pay off the principal on some of the loans. At one point, the family went without electricity for three weeks.
Reginald paid $10 or $15 whenever he could. But even though he paid a total of about $1,900 in interest and principal, not including the money he paid in overdraft fees, he still defaulted on four loans.
A $3,000 title loan is still outstanding. His monthly interest payment is $300, so he tries to pay about $450 each month. Even if he keeps paying every month at this rate, he will pay approximately $2,200 in interest by the time the loan is repaid.
When a loan is extended, the borrower either presents a check or authorizes an electronic debit for the principal value and interest charges, postdated for the day the loan is due. On that day, the lender may deposit the check or request the money from the bank. Borrowers with insufficient funds face a bad check fee of $30 from the lender and overdraft fees from the bank.
As this report illustrates, payday and title lenders prey on the most vulnerable Alabamians, trapping them in a nightmarish cycle of debt when they already face financial distress. They typically operate in low-income neighborhoods and lure unsuspecting borrowers with advertisements offering easy access to cash. They target down-on-their-luck customers who have little ability to pay off their loans but who trust, wrongly, that the lenders are subject to regulations that protect consumers from usurious rates and unfair practices.
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