Consumer groups criticize payday loan operations for their interest rates and collection practices.
Eric Norrington sees himself as one of the good guys. And while he’s not in the charity business, Norrington thinks his company helps thousands of people across the country every week.
“We provide a great product for consumers who don’t happen to have credit, but who are working, supporting their family and have an emergency cash need,” said the vice president of Ace Cash Express Inc., based in Irving, Texas.
Ace, which operates 19 outlets in the Tampa Bay area, is one of the biggest players in the suddenly big industry of making payday loans. The Consumer Federation of America estimates that payday lending is at least a $1 billion per year business, up from almost nothing a decade ago.
A study released Tuesday by the Florida Public Interest Research Group and the consumer federation cast doubt on whether that growth is such a good thing.
The study found that payday lenders charge interest rates as much as 20 times higher than even the highest-rate credit cards and often charge more than 10 percent of a check’s value allowed by Florida law.
“The payday loan industry is the modern day equivalent of loan sharking,” said Florida PIRG director Mark Ferrulo. “People who have already maxed out their credit cards are clearly being taken advantage of with these loans.”
According to the consumer groups’ survey, the eight biggest payday lenders in the Tampa Bay area charge an average of 336 percent interest for short-term loans. Statewide, the average is 350 percent, Ferrulo said.
Lenders, on the other hand, argue that they charge 10 percent to 16 percent interest for the loans – a fair return given the risk involved in making loans to people with little money and few financial resources.
The difference between the study’s numbers and the lender’s numbers comes from the way interest is calculated. A $16 fee for a $100, two-week loan is 16 percent calculated according to simple interest. But extrapolated over a year, as it is with credit cards and other consumer loans, the $16 fee is equivalent to 417 percent interest.
“That’s outrageous,” Ferrulo said. “Even the highest-rate credit cards don’t charge more than 20 or 25 percent.”
In a typical payday loan, a consumer might write a $115, post-dated check to a lender in exchange for $100 cash immediately. The lender agrees not to cash the check until the consumer’s next payday, when there will be enough money in the account to cover it. If the consumer still can’t pay the loan on payday, some lenders agree to roll the account over until the following payday – for another $15 fee, of course.
If the consumer rolls the loan over several times, he or she could end up paying as much as $60 to finance the $100 loan.
Another thing that concerns consumer groups is the collection tactics used by some lenders, Ferrulo said. This summer, for example, state regulators shut down a Stuart lender for using fake Martin County Sheriff’s Office letterhead to threaten borrowers.
“The only way to check these kind of abuses is with stricter regulation of this fast-growing industry,” Ferrulo said. “The state of Florida needs to step up to the plate on this issue.”
Norrington said the fly-by-night lenders make the whole industry look bad.
“I applaud the states that have taken a look at the issue, come up with licensing procedures and asked that they be complied with,” he said. “Legitimate companies don’t have a problem with that.”