The payday loan industry has found a new source of lucrative business: the unemployed.
Payday lenders, which typically offer workers cash advances on their paychecks, offer the same service to people covered by unemployment insurance.
No job? No problem. A typical unemployed Californian receiving $300 a week in benefits can walk into one of hundreds of storefront operations across the state and walk away with $255 long before the government check arrives – for a fee of $45. Annualized, that’s an interest rate of 459%.
Critics of the practice, which has grown as the unemployment rate has risen, say these expensive loans send the unemployed into a cycle of debt from which it will be difficult to exit.
Many payday clients pay off their loan and immediately take out another, or borrow from a second lender to pay off the first, and go deeper and deeper into debt. Typical customers take out such loans about 10 times a year, according to some estimates.
Lenders are “marketing the product to give the illusion of assistance,” said Ginna Green, spokeswoman for advocacy group Center for Responsible Lending. “But instead of throwing a life jacket at them, they throw a cinder block at them.”
The industry sees it as a service, providing short-term loans to people who wouldn’t have a chance with a conventional bank.
What’s clear is that in California, where the unemployment rate hit 12.4% in December, some unemployed workers in need of cash fast are turning to payday lenders, no matter the cost. .
Ed Reyes, a Los Angeles resident who lost his retail job about six months ago, said he’s had to take out payday loans three times since he was unemployed. Advances on his government check, he said, helped him pay his household bills before late fees accrued.
“To be honest, I didn’t know if they would give me one, but they did,” he said, standing outside the unemployment benefits office in downtown Los Angeles.
Ignacio Rodrigues, an employee of payday lender Van Nuys Ace Cash Express, said about a quarter of new borrowers he sees now use their unemployment checks as proof of income.
“They just need extra money, and we do,” he said of instant loans.
It is 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 a 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 enacted during the recession have raised the maximum tenure for some workers to nearly two years.
With regular checks, unemployed workers 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, coincidentally, is 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 collect after approximately 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 lambasted by reviewers. But Steven Schlein, spokesman for the payday lender trade group Community Financial Services Assn. of America, defended the offer of loans to the unemployed, saying critics don’t understand the realities of survival.
“Who are they to decide?” said Schlein. “We issue billions of dollars in credit. They emit platitudes and pats on the back.
“These people need money. They tell them to go to their relatives. These people have bills to pay. These people have to go to job interviews. They need credit.
Schlein said only a fraction of the industry’s customer base is unemployed. It’s still a good deal.
Providing payday loans to borrowers who receive unemployment benefits isn’t necessarily riskier than providing other loans, he said, especially in California, where the benefits are relatively high. Default rates for loans made by the handful of public companies in the sector range from about 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 of Corporations, which regulates lenders. Nationally, payday customers borrow about $40 billion a year.
Payday lenders have been controversial since the industry grew rapidly in the 1990s, with critics accusing the companies of preying on the poor. Arkansas, Georgia, New Jersey, and New York have virtually banned institutions. In 2006, Congress blocked payday loans to military personnel, passing a law capping interest at prohibitive rates for payday lenders. The legislation was spurred by fears that payday loan debt would affect morale and readiness for deployment.
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 EDD,” one employee said through the window, referring to benefits handed out by the state Department of Employment Development. “Checks can stop at any time.”
At a San Fernando Valley branch of payday giant Advance America, however, loans to the unemployed have increased in recent months, said an official who asked to remain anonymous because she was not authorized to speak on behalf of the company.
Most unemployed borrowers, she says, come twice a month and often seem more desperate than other customers.
“They need it more,” she said. “When we tell them they have to wait because they forgot their checkbook or some other problem, you see a sadness in their eyes, like it’s all piling up, 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 get by until the next check,” she said. “It’s not up to us to say they shouldn’t get a loan. It is not our judgement.
An unemployed borrower who only gave his name as Oscar left Ace Cash Express in Van Nuys on a recent afternoon. He said he lost his job at a garden sprinkler installation company a year ago and has been on unemployment insurance ever since. He said he borrows against his benefit checks from payday loan shops 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 threadbare jeans.