Consumers Willingly Pay High Rates for Enough Cash to Live Till Payday

By | January 5, 2015

In a time that finds consumers balking at paying 18 percent on their credit cards, businesses offering short-term loans at more than 500 percent interest are thriving.

The “payday lenders” with such names as Check ‘N Go and the Cash Store have been common in larger cities for years, but now are branching out into smaller markets.

They have come to the Fox Cities area in force, with eight locations opening here in the past six months.

Here’s how they work: A customer brings in a current pay stub, checking account statement and identification.

He or she post-dates a check for two weeks — long enough to make it to the next pay day — and walks away with a loan of up to $1,000. The lender waits the two weeks to deposit the check. If the check is no good, the lender turns it over to a collection agency.

There’s no credit check and the whole process takes 10 to 15 minutes.

For this unusual low-collateral loan, the lender charges $20 per $100 borrowed for 14 days.

That translates to 520 percent interest on an annual basis.

It may sound like the legal equivalent of loan sharking, minus the broken legs, but state regulators say consumers aren’t complaining.

Ten different companies are operating 87 pay-day lending offices in Wisconsin, about half in the Milwaukee area. They are distinct from check-cashing businesses, which charge a fee for cashing payroll checks.

“From a regulation standpoint, it has not been an issue,” said Bob Bonner, director of communications for the state Department of Financial Institutions, which licenses them. “They appear to provide a valuable service to a Please see CASH, H-2 certain segment of the population of Wisconsin..

It’s a service banks no longer want to provide, said J. Edward Scoggins, vice president of Cleveland, Tennessee-based National Cash Advance. It operates more than 150 branches, including one in Menasha and one in Oshkosh.

Other financial institutions created the demand for what’s called pay day or signature lending by backing away from small loans in working class, urban areas, Scoggins said.

“The customer didn’t all of a sudden stop wanting to borrow money,” he said.

Customers don’t care what the annual interest rate is because they don’t borrow the money for nearly that long, he said “I don’t think anyone is going to sit there and try to convince you it’s an inexpensive transaction,” he said. “It’s a way to take care of a short-term need in a short period of time..

He predicted fees will come down here with the increasing competition. Stores have recently been opened locally by the Cash Store (Appleton and New London), Check Advance (Appleton), Check ‘N Go (Appleton and Oshkosh), Check Into Cash (Appleton) and National Cash Advance (Menasha and Oshkosh).

The customers see it as a cheaper alternative to risking bouncing a check and paying much higher fees to the bank and merchant involved, said Peggie Domkowski, manager of the Cash Store in Appleton.

“This helps take care of a need and make it to pay day,” she said.

Most often it’s an unexpected medical or mechanical bill, according to Steve Scoggins, brother of Edward and president of the unrelated Check Into Cash of Wisconsin, whose parent company is also based in Cleveland, Tenn.

“We find the No. 1 reason is car repairs. People, if they don’t have their car working, can’t get to work,” he said.

Dennis Jansen, of the non-profit financial counseling agency FISC, said he’s concerned pay day lending will target low income people who have already run up their credit cards or are facing a deadline on paying on another loan. The easy loans will also be a temptation for problem gamblers, he said.

Mike Sheperd, a certified financial planner with American Express Financial Planners Inc. in Appleton, said the goal is to have enough cash reserve that you can handle these unexpected expenses.

“I think it can be dangerous to get a signature loan,” he said. “Like a credit card, it’s easy to get over your head..

He called the interest “outrageous” and recommended consumers instead use credit cards that give a 30-day grace period before charging interest.

The pay day lending business has become very active in just the past year, said Henry Shyne, executive director of the National Check Cashing Association.

“It does fill a void in financial services,” he said.

The trend seems to have begun in the Southeast, near military bases, according to Shyne, and grown through the Midwest.

“At this point in time, we don’t know how large it is,” he said, “but it’s been growing through several states very quickly..

Edward Scoggins said National Cash Advance’s computer profiles show the typical customer is a two-income family earning $32,000 a year that has access to credit cards.

Borrowing the typical loan amount of $200 for two weeks at one of the pay day lenders costs $40. Putting the same $200 on a credit card at 18 percent interest for a full month would cost $3.

Why make such a seemingly poor economic choice.

Scoggins said people know if they did put the expense on a credit card, they would carry it for more than a month. The short-term loan forces them to pay it in two weeks.

“It’s quick, it’s easy. Banks don’t give short-term loans,” explained the manager of Check ‘N Go in Appleton, who would identify herself only as Kelly.

“I guess it’s just our generation,” she said. “We want something and we want it now.”