Linda, a local drugstore clerk, doesn’t know exactly how much money she has put toward payday loans during the past few years. But she’s certain it is astronomically more than the few hundred dollars she initially borrowed.

Linda, who asked that her last name not be used for privacy reasons, was going through a divorce and needed money to pay bills.

The quick cash available through a payday loan seemed like an easy solution, she said.

Payday loan stores like this one in Woodway are the target of several social policy groups.
Duane A. Laverty/Tribune-Herald

At first, Linda was able to at least keep up with the fees charged for borrowing the money. She was working two jobs at the time.

But before long, she found herself taking out another loan to pay off the first. And then another. And another.

All told, Linda ended up with seven or eight different loans over a two-year period, she said. She managed to pay off a couple of them.

But with the rest, her money mostly went to the recurring fees. The principal amounts hardly budged.

Finally, about a year ago, Linda decided to give up on repayment. She’s since been harassed by collectors, some of whom have gone as far as to falsely claim they could have her arrested for her debt.

“I wish I would have never gotten into this,” Linda said.

Situations similar to hers could become less common if a recently formed coalition has its way.

The coalition includes religious organizations and consumer groups — ranging from the AARP to the Baptist General Convention of Texas.

Coalition members say payday loans hurt not only individual consumers but entire communities.

They want the Texas Legislature to place caps on the fees that can be charged for the loans and more strictly regulate businesses that offer them.

“Texas is the Wild West,” for payday lending, said Tim Morstad, associate state director for advocacy for AARP Texas. “We have no data, no licensing, no nothing.”

Payday loans are small cash advances that get their name from the idea that people will repay the money with their next paycheck.

The loan period is typically two weeks, and borrowers must provide a postdated check or electronic access to their bank account.

Growing industry

When payday loan stores started cropping up in Texas in the 1990s, they were largely confined to low-income, urban neighborhoods. But they are now nestled in strip malls and increasingly located in affluent and rural areas.

The coalition estimates Texas payday loan outlets have tripled in the past four years, growing to more than 3,000 locations.

McLennan County has more than two dozen such businesses, with to-the-point names like Cash Store and First Cash Advance.

What makes payday loans so harmful, the coalition said, is their cost. On average, Texas borrowers pay $15 to $22 in interest and fees for every $100 borrowed.

Converted to an annual percentage rate (APR), that can translate to more than 500 percent.

The industry acknowledges payday loans are more expensive than traditional forms of credit. But many people who use them don’t have access to credit cards, bank loans or other usual borrowing methods, said Rob Norcross Jr., spokesman for an industry group called the Consumer Service Alliance of Texas.

Without the payday option, many would be late on bills and face hardships such as having utilities cut off, Norcross said.

That could cost them more in the end. For example, a $29 late fee on a $100 credit card balance represents 756 percent APR, he said.

APR isn’t the best way to talk about short-term loans, though, Norcross said. If you told someone they had to pay back $115 for $100 they borrowed for two weeks, most would say they were paying 15 percent interest.

The eye-popping APRs cited by opponents are accurate only if a loan is rolled over for a year, he said.

“There’s a lot of rhetoric out there,” Norcross said. “But I think (payday lending) is an important piece of the credit landscape.”

Consumer advocates say the industry isn’t being honest about its business model. Payday lenders like to say they are a safety net for people occasionally short on cash.

But most borrowers use the money to pay for routine expenses such as housing or food, Morstad said.

The industry makes most of its money off repeat borrowers, Morstad said. National research has found 75 percent of profits come from “churned loans,” meaning loans people extend.

Fees are usually tacked on to each extension.

Two recent Texas surveys found 58 percent of payday borrowers roll over their loans at least once. Nearly a quarter extend their loans multiple times.

What makes payday loans a “defective product” is the short repayment period, said Don Baylor, a senior policy analyst for the Austin-based Center for Public Policy Priorities.

People short on cash can rarely repay the money, plus fees, in just two weeks.

“It’s essentially a ticking time bomb in your budget,” Baylor said.

Payday loans are also bad for economic development, Baylor said. Families can easily spend 10 percent to 30 percent of their paychecks juggling the loans.

“That’s money that could be spent at the grocery store,” he said.

Waco attorney John Fugate said he has seen far too many people get dragged into inescapable debt due to payday loans.

It’s a driving factor in a number of bankruptcy cases he has seen. He compared payday lenders to loan sharks.

“When (consumers) have six to seven payday loans, sometimes there’s not a lot they can do to get out of that situation,” Fugate said.

‘Modern-day slavery’

The Rev. Valda Jean Combs, pastor of Wesley United Methodist Church in East Waco, calls payday loans a form of modern-day slavery.

Combs first saw how destructive the loans could be when she was a pastor in Groesbeck a few years ago. A number of seniors there would get people to drive them into Waco so they could use their Social Security checks to get payday loans, she said.

Since coming to Waco, Combs has continued to hear from people struggling with payday loans. She warns against the lure of easy money in sermons and said churches need to do a better job of helping people in emergencies, whether or not they are members.

Her congregation, for example, occasionally helps people pay utilities bills or gives them gas money to get to work, she said.

Many churches have benevolence funds that can give emergency assistance.

“It is our responsibility to educate the people and help the people out of these situations,” Comb said. “We also need to advocate for them, especially when people don’t realize they are being exploited.”

Norcross, from the industry group, said payday lenders are working to offer better solutions to borrowers who get in over their heads.

Repayment plan

One such option is a repayment plan that gives people an additional four to six weeks to pay off their loan, without rollover fees.

The majority of Texas payday lenders offer such plans, Norcross said. Some have started promoting toll-free numbers consumers can call to ask for no-fee extensions, he said.

Consumer advocates, though, say much more needs to be done. They are optimistic that growing, broad-based concern about payday lending will spur lawmakers into action.

For example, religious groups such as the Baptist General Convention of Texas and the Texas Catholic Conference have recently thrown their influence behind regulation efforts.

Advocates want the state to close a loophole that allows payday lenders to avoid the licensing and loan cost regulations that apply to other lenders.

The industry argues such changes would put many stores out of business. But advocates point out that lenders could still charge as much as 150 percent APR for short-term loans.

Advocates also note that 15 states have capped loan costs at 36 percent APR, and payday lenders continue to operate there.

“It’s not about putting (lenders) out of business,” said Ann Baddour, senior policy analyst for Texas Appleseed, a nonprofit public interest law center. “It’s about requiring all these businesses to play by the rules.”

cculp@wacotrib.com

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