Short-term lending, or payday lending, is a multi-billion dollar industry. Fifteen million Americans used the service just last month. But high interest rates have caught the eye of critical federal and state regulators. Now the payday lending industry is spending $10 million on a public awareness campaign to educate people about using short-term loans.
Here's an example of a payday loan. Someone borrows $500 and repays it in two weeks. The borrower typically pays about $75 in interest. That's a 390 percent annual interest rate. But facing pressure from regulators, The Community Financial Services Association, which represents the short-term loan companies, is running this ad encouraging borrows to be careful.
Don Gayhardt is president of Dollar Financial, a payday lender, and a member of the CFSA. Gayhardt said the association felt it needed to step up as industry leaders and encourage responsible borrowing. The industry is also introducing an extended repayment plan giving borrowers extra time to pay back their loans without new fees. But this comes after pressure from consumer advocates and policy makers who want to get a handle on the triple digit interest rates.
"We've listened to customers. We've listened to people in the public policy world and elected officials. And I think CFSA has always been about having a leadership role and putting in place the best practices for our companies and following up that with working to put those best practices into law. Across the country we have payday advance regulations now on the books in 37 states," Gayhardt said.
When asked if part of the reason for the campaign is too many defaulted loans, Gayhardt would not give a direct answer.
"The overwhelming percentage of customers that we talk to use the product for short-term needs. You know, their car breaks down they, they have healthcare issues, everything, you know, kids need new school uniforms. I mean there are a whole list of kind of household short-term, unexpected expenses that come up," Gayhardt said.
Many people who use payday lenders are those who live paycheck to paycheck. Often times they are unable to repay the money on time, racking up hundreds of dollars in interest. Kathy Virgallito is with the Consumer Credit Counseling Service.
"They're using a payday lender as a way to supplement the income that they have, but when it comes time to pay back that loan, they don't have the money in their budget to do that because it's already promised out to other bills," Virgallito said.
But the association's Don Gayhardt said payday loans are cheaper than bouncing a check and paying overdraft fees, which are about $28.
"There's a whole series of academic research which has been done on this point, which indicates that payday advances, having payday advance as an option for consumers with short-term credit need helps people manage their day to day financial lives. And not having payday advance as an option means they're going to end up with more expensive and less flexible options," Gayhardt said.
For those who are able to repay the loan on time, that may be the case. But Virgallito said many times people will take out loans at other payday lenders to pay off the ones they already have, creating an endless cycle of debt.
"We frequently find people who are struggling with repaying back those loans. They may have loans with several payday lenders and they're not able to pay them off," Virgallito said.
Some states are moving to keep the rates lower. Congress recently capped annual interest rates for military personnel at 36 percent. In Ohio, fees are limited to $15 per $100 loan. The law also keeps people from renewing loans repeatedly at the same store.