Saturday, December 23, 2006

Unregulated predators: Payday loans are a controversial subject in much of the West, where the lack of financial infrastructure and vast, nearly invisible rural poverty condemns many workers to massive interest. The typical interest paid on such a loan is $15 for every $100, which, the Times says in a report today, works out to 520 percent per annum, if the loan is rolled over. (Federally licensed long-term lenders may only lend at 17 percent or less.)

In Oregon, my home state, a law this year capped interest on short-term loans at 36 percent per annum, or 10 cents per diem on a two-week loan, and the Pentagon recently issued the same regulation for lenders to military employees. Eleven states ban payday loans outright, under usury laws. But the Times is reporting from New Mexico, which has no laws regulating this vulture-like behavior:

[Earl] Milford is chronically broke because each month, in what he calls “my ritual,” he travels 30 miles to Gallup and visits 16 storefront money-lending shops. Mr. Milford, who is 59 and receives a civil service pension and veteran’s disability benefits, doles out some $1,500 monthly to the lenders just to cover the interest on what he had intended several years ago to be short-term “payday loans.”

Mr. Milford said he had stopped taking out new loans, but many other residents of the Gallup area and countless more people across the country are visiting payday lenders this month, places with names like Cash Cow, Payday Plus and Fast Buck, to get advances of a few hundred dollars to help with holiday expenses.


The loans are quick and easy. Customers are usually required to leave a predated personal check that the lender can cash on the next payday, two or four weeks later. They must show a pay stub or proof of regular income, like Social Security, but there is no credit check, which leads to some defaults but, more often, continued extension of the loan, with repeated fees.

In many states, including New Mexico, lenders also make no effort to see if customers have borrowed elsewhere, which is how Mr. Milford could take out so many loans at once. If they repay on time, borrowers pay fees ranging from $15 per $100 borrowed in some states to, in New Mexico, often $20 or more per $100, which translates into an annualized interest rate, for a two-week loan, of 520 percent or more.

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