The payday loan industry has found a new source of lucrative business: the unemployed.
Payday lenders, who typically provide workers with cash advances on their paychecks, provide the same service to people covered by UI.
No work? No problem. A typical unemployed California worker receiving $ 300 a week in allowances can walk into one of hundreds of stores statewide and walk out with $ 255 long before that government check arrives, for a fee. of $ 45. annualized, that’s an interest rate of 459%.
Critics of the practice, which has developed with the rising unemployment rate, claim that these expensive loans send the unemployed into a cycle of debt that will be difficult to break out of.
Many payday clients pay off their loans and immediately take out another, or borrow from a second lender to pay off the first, and become increasingly indebted. Typical clients take out such loans about 10 times a year, by some estimates.
Lenders “market the product to give the illusion of assistance,” said Ginna Green, spokesperson for the advocacy group Center for Responsible Lending. “But instead of throwing them a life jacket, they throw them a cinder block.”
The industry sees it as a service, offering short-term loans to people who wouldn’t stand a chance with a conventional bank.
What is clear is that in California, where the unemployment rate hit 12.4% in December, some unemployed people in need of quick cash are turning to payday lenders no matter what the cost. .
Ed Reyes, a Los Angeles resident who lost his retail job about six months ago, said he has had to take payday loans three times since being unemployed. Advances on his government check, he said, helped him pay his household bills before late fees accumulated.
“To be honest, I didn’t know if they would give me one, but they did,” he said, standing outside the downtown Los Angeles unemployment benefit office.
Ignacio Rodrigues, an employee of Van Nuys Ace Cash Express payday lender, said about a quarter of first-time borrowers he sees now use their unemployment checks as proof of income.
“They just need the extra money, and we are doing it,” he said of instant loans.
It’s legal. Payday loans are regulated by the state, but lenders are not required to verify sources of income. A borrower only needs a bank account and valid ID to get a loan.
In California, nearly 1.4 million unemployed residents receive unemployment benefits, out of a pool of some 2.3 million unemployed, according to the most recent figures. Weekly benefits range from $ 40 to $ 450 and normally last a maximum of 26 weeks. But federal extensions signed during the recession raised the maximum duration for some workers to nearly two years.
With regular checks, the unemployed can be reliable borrowers for payday lenders. By law, lenders can charge a fee of $ 15 for every $ 100 borrowed. The maximum loan in California is $ 300 – which is coincidentally about the size of the average Golden State unemployment check.
The borrower leaves a post-dated personal check to cover the loan and fees, which the lender can cash in after about two weeks.
In California, the maximum annual interest rate allowed for these loans is 459%. APRs in other states are even higher: nearly 782% in Wyoming and 870% in Maine. The rates are castigated by critics. But Steven Schlein, spokesperson for the Community Financial Services Assn. of America, defended offering loans to the unemployed, saying critics did not understand the realities of scratching.
“Who are they to decide? Said Schlein. “We issue billions of dollars in credit. They utter platitudes and pat on the back.
“These people need the money. They tell them to go see their relatives. These people have bills to pay. These people have to go through job interviews. They need credit.
Schlein said only a fraction of the industry’s customer base is unemployed. It’s still a good deal.
Giving payday loans to borrowers who are on unemployment benefits is not necessarily riskier than giving other loans, he said, especially in California, where allowances are relatively high. Default rates for loans made by the sector’s handful of state-owned companies range from around 2.5% to 5%, Schlein said.
There were 2,385 licensed payday lenders in California in 2008, according to the most recent report from the State Department for Corporations, which regulates lenders. Nationally, payday customers borrow about $ 40 billion annually.
Payday lenders have been controversial since the industry grew rapidly in the 1990s, with critics accusing the outfits of preying on the poor. Arkansas, Georgia, New Jersey and New York have all but banned institutions. In 2006, Congress froze payday loans to military personnel, passing a law capping interest at prohibitive rates for payday lenders. The legislation was spurred on by fears that payday loan debt could affect morale and deployment readiness.
Although California has capped the maximum loan amount, attempts to further regulate the industry – by lowering the APR, for example – have failed.
Some payday lenders refuse to lend to the unemployed.
At Papa Cash in Van Nuys, customers are greeted with the motto “Where Papa always treats you like family”. But the store does not accept unemployment checks as proof of income.
“No ESD,” an employee said through the window, referring to the benefits distributed by the state’s employment development department. “The controls can stop at any time.
At a San Fernando Valley branch of payroll giant Advance America, however, loans to the unemployed have increased in recent months, said an official in the area who asked to remain anonymous because she was not authorized to speak to the unemployed. Company Name.
Most unemployed borrowers, she said, come twice a month and often seem more desperate than other clients.
“They need it more,” she said. “When we tell them that they have to wait because they forgot their checkbook or some other problem, you see a sadness in their eyes, as if everything is piling up, the frustration.”
Still, the manager said she sees her business as providing an all the more vital service in difficult times.
“For an honest, hard-working family member, we can really help them survive until the next check-up,” she said. “It’s not for us to say they shouldn’t get a loan. It is not our judgment.
An unemployed borrower who only gave his name as an Oscar left Ace Cash Express in Van Nuys one recent afternoon. He said he lost his job at a garden sprinkler installation company a year ago and has been on unemployment insurance since. He said he was borrowing against his benefit checks at payday loan stores to make ends meet.
“It helps me pay for food, my apartment, other expenses,” he said in Spanish, slipping an envelope of cash into his worn jeans.