A new report finds consumers are using payday loans for everyday needs versus one-time emergencies.
August 20, 2012 1:05 p.m.
Nick Bourke, Project Director, Pew Charitable Trust's Safe Small-Dollar Loans Research Project
Miro Copic, SDSU School of Business Administration
Related Story: Report: Payday Loans Used For Everyday Expenses
MAUREEN CAVANAUGH: This is KPBS Midday Edition. I'm Maureen Cavanaugh. Short-term high-interest payday loans have long been a target of consumer advocates. They say it is easy for borrowers to get caught in a so-called debt trap even currently borrowing a couple hundred dollars at a time. Now the California Department of corporations has issued a warning about a new trend in payday lending. Based on information compiled by the pew. The public corporation department is alerting consumers to Internet payday lenders who can apparently circumvent state consumer protection laws. I'd like to introduce my guests. Nick Bourke is project director for Pew safe small dollar loans research project. And Nick, welcome to the show.
NICK BOURKE: Thank you glad to be here
MAUREEN CAVANAUGH: And my other guest is Professor Miro Copic with the school of business administration and Prof. Copic welcome back.
MIRO COPIC: Thank you very much, Maureen.
MAUREEN CAVANAUGH: Nick, when we call these payday loans high-cost, what exactly are we talking about? How much is the interest?
NICK BOURKE: Well, the price is usually given in terms of how much money is spent per hundred so 1500 per hundred is a common fee and that translates to in percentage rate of 391, 400%.
MAUREEN CAVANAUGH: Which is the kind of an interest rate of people just take a gas pipe. How much do people usually borrow on these loans?
NICK BOURKE: They are usually pretty small money California people would borrow about $300. Elsewhere around the country you might get four, five, $600 but they tend to be around the range.
MAUREEN CAVANAUGH: In your report why did people say they need the loans?
NICK BOURKE: This is an interesting point because even the payday loans are usually packaged as products that people need for emergencies and for short periods of time, the reality is quite different. Seven in 10 people in a national survey of payday loan borrowers said that they turned to a payday loan in order to pay for ordinary regarding living expenses things like rent and utilities and car payments and food. Only one in six people who borrowed on a payday loan said that they turn to it for some kind of unexpected emergency.
MAUREEN CAVANAUGH: Prof. Copic, what does that tell us about our economy?
MIRO COPIC: I think it tells us that there could be some structural changes that are occurring that are not going. When you have according to the study which was excellent, by the way-I have 6% of the adults I use payday loans, they use them, the ones on a regular basis six or seven times here they are stretching into that next payday maybe they've run out of sources of friends tomorrow from there they may not have credit which is an alternative is a cash advance on your credit card there may be as high as 20 through 24% but if orange percent or even states where there are restrictions to interest rates like 120% in certain states or even 36% on an annual basis in some states according to the study they have recourse.
MAUREEN CAVANAUGH: You mentioned something about people borrowing against their next paycheck and against the next paycheck, and against the next paycheck and I think that I've heard that referred to as a debt trap. What does that actually bring about? Somebody who is constantly in debt, Prof. Copic, what, and it is not just one person, but it seems to be a group of people.
MIRO COPIC: I want to clarify I think the study brings that out as well, there are some restrictions us down the loan somebody can take so there are some states that are immersed restricted but allow you to take one going out and pay it back before you can take out another one. The other one is what you referred to as a debt trap. One of the challenges that it does is it takes a big chunk of the population out in terms of these planned future expenses. You know, you are paying your rent, most of these are renters, not even mortgage holders. They are paying cable bills, they are paying utilities, they are not buying the goods and services that are going to help the economy rebound and if you are saying five and have 6% being counted the study what is the trend over the last two years? Has the crown, has that continue to grow are there fewer alternatives for some of the individuals and that creates a big problem and a drag on the economy.
MAUREEN CAVANAUGH: Now, Nick Bourke, California's public corporations issued an alert on online payday loans. It's based on a lot of the information that you developed in the Pew report. They say that many are moving away from storefronts to the Internet. What did you find in your report about online borrowing?
NICK BOURKE: The new Internet payday lending has a whole host of unique problems. So you kind of look at payday lending generally and you see that there are structural concerns because the active average payday loan has been entered for five months it's not a short term loan. A lot of problems in payday lending generally. But then you look at Internet payday lending there are a lot of unique issues. We see in our survey which we are working on the survey data for future publication but we also looked at our focus group findings so we could focus groups in California and all over the country and we see a lot of problems people are having with Internet payday lenders who are difficult to find who may call and make threats you know we're going to arrest you we will call your employer and get you fired. Electronic authorization and peoples checking accounts, so payday lenders are may be being lesson scrupulous and taking my money than narrowed or doing it more frequently. There are a lot of problems with Internet payday lending. One thing that's really important to keep in mind is that Internet payday lending generally is not really a substitute for storefront payday lending. We look at this really carefully in our data. And we see that even though Internet payday lending is becoming more popular, more people are using every year, that trend is not being driven by restrictions on storefront payday lending. So, when you close storefront payday lending stores or when you have policies that protect people from some of the harms that there is places you know there are some states that restrict storefront payday lending that trend is not driving Internet payday lending it is a completely different product.
MAUREEN CAVANAUGH: But it sounds like is it is a completely different customer, too. Why would online borrowing be attractive to some people?
NICK BOURKE: Well it tends to follow demographically the same kinds of characteristics you see in Internet users generally. Some people use Internet payday loans will tend to be on the underside, will tend to be a little bit higher income, will tend to have a higher level of education compared to your typical payday, storefront payday loan borrower that is just a common trend between people who will tend to do business and buy things online compared to those who don't.
MAUREEN CAVANAUGH: I don't know about these review, Prof. Copic, I have seen ads on television for payday loans. I guess they fall somewhere between the Internet and the storefront locations. They say that you can have up to $10,000 in your bank account tomorrow. Prof. Copic, is that type of marketing effective?
MIRO COPIC: Yes, obviously it's been effective because it gives consumers another alternative to obtaining funds for whatever requirement. And again, as was mentioned, they are very careful about talking but really it is been designated for those unexpected expenses or one-time expense rather than everyday expenses they talk about this maximum but most of the payday loans are for several hundred dollars just to kind of make it to the next paycheck. There's a few firms that dominate the landscape advance America, money tree. They are very aggressive on cable and very specific day parts, where a lot of people who may have, maybe home we noted in our research you've got people who may be underemployed, single-parent households, from a divorced household. And so they target those day parts, with that message, and that's very attractive and it gets people to go to those storefronts.
MAUREEN CAVANAUGH: Prof. Copic, one of your specialties is marketing. Often the ads seem to be targeting a specific ethnic group. You will see a spokesperson who is Latino, or someone who is black or someone who is Native American. That is on purpose, right?
MIRO COPIC: Well I think you know, from a marketing perspective to segment your audience with a believable spokesperson is very important for a company. The data suggests from the Pew study that African-Americans in particular are wage indexed higher for these payday loans than most other ethnic groups even though whites or Caucasians are the largest number of users of payday loans as a percentage of the population it is a lot less. Hispanics kind of fell in between
MAUREEN CAVANAUGH: Nick, another payday lenders have been criticized urine scented before targeting members of the military and their families. Is the military still a target for payday lenders?
NICK BOURKE: Well a lot has changed in recent years and in fact at the federal level there is really no policy about payday lending except when it comes to the military. But if the military lending act did seek to protect military servicemembers and their families. It's hard to say from our data what the trend has been but from other data I've seen out there there has been a lot less Payday lending activity payday borrowing activity among military households. The problem is that it's not all gone and there is some innovation around the fringes. And increasingly you can see 90 one day loans are loans that are, they will call the lungs open-ended. They are like lines of credit and this is all kind of designed to work outside the boundaries of that federal restriction against payday lending to military servicemembers. So over time I think we could see it grow back.
MAUREEN CAVANAUGH: I know that just several years ago there was even some mentioned that the number of military families and military members who were intent mostly to payday lenders was threatening national security. Is that why the federal government stepped in on that?
NICK BOURKE: Exactly why. There was a real concern that there were a lot of especially young servicemembers who were relatively low. But they are out on their own and maybe they have automobile debt or other kinds of debt, and that kind of payday loan product does create a dependence and I think it is important to think about this for a moment because I know when I first started doing this research I really was asking myself, how can somebody borrow three or $400 and end up being in debt for five or six months and we pick five or six or $700 in interest. How does that happen? It's not because people are foolish. Our research really has shown me that there are two main reasons why it happens. One is the structure of the loan itself. The whole amount is due on your next payday so if you don't have $300 today and you borrow that from a payday lender the whole amount is due on your next payday in two weeks or four weeks. And very few people can make that happen. If you can't afford the loan, then you pay the fee again. So maybe you picked $45 in fees again to buy yourself another two weeks and the cycle repeats. So the loan principal that you owe is never going down, you're not touching that until you can come up with enough money to repay the whole thing that's when you see people using tax refunds to pay off a loan. Or going and borrowing money from dad or selling a stereo or something like that. A lot of the same options by the way the people who tell us that they would use if payday loans weren't available in the first place and that brings me to my second point which is that when thinking about why to take out a payday loan a lot of people already are very sophisticated about that. They have student loan debt they have card that they have may be mortgage debt even, they have credit card debt and they do not want more debt, the one another bill on the pile and they want to believe very much in the marketing message from a payday lender that this is a kid in and get out quickly that it will not be another debt on the pile you will have it for a short period of time. But of course the data shows that is not the case most people are indebted five months when they take a payday loan.
MAUREEN CAVANAUGH: So therefore Prof. Copic listening to what Nick was just saying that the marketing strategy and how people take out the loans, they are not stupid they really do want this thing to be a quick turnaround and it often isn't. You think therefore California maybe should have some more regulation about how these loans are marketed?
MIRO COPIC: You know, according to the pew study, California is one of the markers progressive states. And so it is clear and the more restrictive states while the number of storefronts didn't necessarily go down the behavior of consumers changed somewhat dramatically where people then decided to cut back on expenses. They went to friends, two other friends and family, they sold things that pawnshops, whatever it is to raise the funds. It is a way to help just behavior. Whether that is the right thing or not because one could debate it is the optimism of a consumer thinking I can repay it in the next paycheck I just need the 300 bucks today and the question is are they really looking hard and saying really can I repay because if they're going to go five months that means is they are looking deep down, they can't.
MAUREEN CAVANAUGH: Payday lenders were nationally sanctioned for abuses in 2012. What types of the pieces are being reported? What should consumers watch out for?
MIRO COPIC: There are a few different things that we for borrowers talk about in our focus groups and in our surveys, so one of them is that when somebody submits their information to a website, what borrowers or potential borrowers don't always know is that when you put information into a website you are giving your information usually to what is called a lead aggregator or a lead generator. They take your information and they distributed, so it widely to a number of potential lenders. So, entering your personal information, which includes bank account numbers and Social Security numbers and all kinds of personal information can very quickly get spread to a lot of different entities and very quickly people can be getting phone calls e-mails and text messages offering loans. Another type of thing that happens then is a type of fraud or potential fraud where a lender will get a hold of a person's information and whether they actually have the person's permission or not they will actually deposit some money and the person's bank account electronically, say $200 and immediately begin trying to collect a much higher number one say add-on fees and interest say $800 is what one person told us and a third type of problem is abuse. Lenders, debt collectors and others calling possibly from other countries and saying you owe us money, if you do not pay us right now we are going to have you arrested we are sending the police to you right now we will call your employer and get you fired we will call your friends and family. A lot of very tense abusive situations that people have talked about.
MAUREEN CAVANAUGH: And Nick, quickly because we're almost out of time is there any place someone can go if they are being abused this way by a payday lender online?
NICK BOURKE: Yes in California the place to go is the California Department of corporations. On their website they have a phone number that borrowers could call to check and see if the lender they are dealing with is licensed in California and if they are not the department has some advice for how to deal with that.
MAUREEN CAVANAUGH: I am out of time. I've been speaking with Nick Bourke with safe small dollar loans and Miro Copic, SDSU professor at the school of business administration. Thank you both very much.
NICK BOURKE: Thanks, Maureen.
MIRO COPIC: Thank you.