Payday loans can wreak havoc on a person's financial life. These loans carry sky-high APRs and the penalties for late or missed payments can be extreme. Many consumers, who turned to payday lenders in a time of need, later find themselves worse off than when they started. In this series, WalletPop takes a look at the payday lending industry and some of its players: those who dole out the loans, the regulators who try to rein them in and the people who desperately take out these loans hoping for a fresh start. This is the first installment of our payday lending series.
When you're broke, as in really broke, the reasons for taking out a payday loan seem logical. But payday loans can be a gateway to a serious problem; a vicious cycle that can seem impossible to escape. I should know. Two years ago, when the recession started to rear its ugly head, I took out my first payday loan.
I'd like to say that I turned to these loans -- which typically offer rates of as high as 390% APR and sometimes double that -- just once or twice, but throughout the recession, as magazines I worked for folded, they became the one place I could turn to if we really needed money in my bank account. And there were times when I really did need to inject some income into our checking account -- or run out of grocery money or have our utilities turned off.
In my case, I never had a problem paying any of my loans back, and frankly, I'm not sure what I would have done during the worst months of the recession if payday lending didn't exist. But I've been lucky, so far. Taking out a payday loan can be a little like playing with dynamite.
"Once you get in that cycle, it's hard to get out," says Curtis Arnold, a personal finance expert, author and CEO of CardRatings.com, a credit card comparison site. "It feeds on itself where you become more and more dependent and you end up owing more of your soul, if you will, to these lenders."
If the Center for Responsible Lending is correct, the average customer who takes out a $350 loan can find themselves stuck in a debt cycle where they wind up paying $822.50. How that happens to be, I assume, is that if you're on a fixed income, living paycheck to paycheck, your expenses are fixed, and you likely don't have a lot of wriggle room to be taking out loans. So taking out a $350 loan and then trying to successfully repay it within two weeks can be quite a hat trick.
How a $200 Loan Turned Into $1,800 in Payments
For the purposes of this article, I tried to find people who took out payday loans and rued that decision, but it's not something a lot of people are proud to admit in print. Still, I did find one woman brave enough to share her story.
Joylynn M. Jossel is a poet and author in Columbus, Ohio, who took out a payday loan several years ago. It was only a couple hundred dollars at first, but she had trouble making the payment two weeks later. She doesn't recall exactly what the interest being charged was, but I can tell you that in Ohio, for every $100 you borrow, you fork over $15 to a payday lender, and that comes to around 390% APR. The APR is meaningless, though, if you pay off the debt in time. If you don't, then, sure, the APR becomes very significant.
And in Jossel's case, she couldn't pay off her first loan. Desperate, she turned to a second payday lender in order to pay back the first payday lending store. "Before I knew it," says Jossel, "I found myself owing three to four different lenders."
Every month, Jossel would pay off her loans to the lenders -- and then, because she needed money to pay her bills -- she would take out another loan right away. She eventually found herself spending up to $1,800 per month toward payday loans. And when that became too overwhelming, Jossel wound up asking friends to take out a payday loan on her behalf.
The Harassment Begins
Eventually, she wound up letting one of her $600 payday loans bounce. "It was either that or not pay my rent that month," explains Jossel. She soon began hearing from collection agencies. "It was horrifying," she says. "They tell you any and everything to get you to come in and pay for the check that didn't clear. They'll tell you,' You're a criminal, you wrote a bad check. That's against the law, it's a felony, you're going to jail.' They call all of your references and your job. It's horrifying. I felt so suffocated. It felt as if I was in this black hole that I just couldn't get out of."
Once the first payday loan bounced, Jossel eventually let the other three bounce as well. It was either that or not pay rent, utilities, and live her life-- even if it was turning into a very unpleasant life.
Jossel was a paralegal working for an insurance company at the time, and all of the calls came through the receptionist, who would announce over the speaker who the caller was. "Pay Day Loans," the receptionist would chirp before switching over the caller to Jossel.
"It never hurt my standing at my company, but I felt like everyone knew what was going on," says Jossel. "I mean, honestly, everybody goes to the receptionist to get the dirt on employees."
Throughout her payday loan debacle, Jossel felt as though she couldn't breathe. "Every time the phone rang, I'd jump like I was the next one in a horror movie to be taken out," she says. "I'd fear they'd come to my house because I'd known them to go to people's houses before. I felt guilty just putting gas in my tank. I felt guilty buying food. I felt as though any money I got should be going to the payday lenders and collection agencies to get them off my back."
Jossel was only able to pay everyone back after she collected money from a civil lawsuit on an unrelated matter. She can't look back at that period of her life without shuddering. But she isn't bitter. "I owed them money," she says. "The debt was legitimate based on my financial irresponsibility."
Since those days, says Jossel, "I have never, and I mean never, thought twice about visiting a payday loan center ever again in my life."
The Worst Case Scenario
If I have been lucky with my payday lending dealings, Jossel has, too. At least she didn't have to hire someone like William Devine II, Esq.
Devine is a bankruptcy and debtor's rights attorney in the Las Vegas area. Of all the potential clients Devine meets, "the ones in the worst financial situation have all had payday loans. The majority of the time, these same people have payday loans from multiple companies around town. They borrow from one to pay the other. When they run out of companies to borrow from and can no longer maintain the facade of financial liquidity, they seek out a bankruptcy attorney. In reality, they should have done so prior to obtaining a payday loan."
Devine meets people on a daily basis who took out payday loans and never should have. In my experience, payday loans were a lifeline, but an expensive lifeline. While I like to think I came through my payday loan misadventures due to being careful and thoughtful while going through the process, it may well have been sheer luck that I didn't wind up sliding into the financial abyss in the way Jossel did.
Geoff Williams is a frequent contributor to WalletPop. He is also the co-author of the book Living Well with Bad Credit.
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