The Straits Times March 25, 2008
Such ‘payday loans’ come with high interest rates, piling on the debts
CLEVELAND (OHIO) – AS HUNDREDS of thousands of American home owners fall behind on their mortgage payments, more are turning to short-term loans with sky- high interest rates to get by.
While hard figures are hard to come by, evidence from non-profit credit and mortgage counsellors suggests that the number of people using these so-called ‘payday loans’ is growing. This is a negative sign for economic recovery as the United States housing crisis deepens.
‘We’re hearing from around the country that many folks are buried deep in payday loan debts as well as struggling with their mortgage payments,’ said Mr Uriah King, a policy associate at the Centre for Responsible Lending.
A payday loan is typically for a few hundred dollars, with a term of two weeks, and an interest rate as high as 800 per cent. The average borrower ends up paying back US$793 for a US$325 loan, according to the centre.
The centre also estimates that these lenders issued more than US$28 billion (S$38.9 billion) in loans in 2005. This was the latest available figure.
In the Union Miles district of Cleveland, which has been hit hard by the crisis, all the regular banks have been replaced by payday lenders.
‘When distressed home owners come to us, it usually takes a while before we find out if they have payday loans because they don’t mention it at first,’ said Ms Lindsey Sacher, the community relations coordinator at non-profit East Side Organising Project, which works to refinance US sub-prime mortgage borrowers on the verge of default or foreclosure. ‘But by the time they come to us for help, they have nothing left.’
On top of the steep cost, payday loans have an even darker side, Ms Sacher noted. ‘We also have to contend with the fact that payday lenders are very aggressive when it comes to getting paid.’
Mr Bill Faith, executive director of the Coalition on Homelessness and Housing in Ohio, an umbrella group representing some 600 nonprofit agencies in Ohio, said the state is home to some 1,650 payday loan lenders. This is more than all of Ohio’s fast food franchises put together.
‘That’s saying something, as the people of Ohio really like their fast food,’ Mr Faith said. ‘But payday loans are insidious because people get trapped in a cycle of debt.’
Mr Robert Frank, an economics professor at Cornell University, equates payday loans with ‘handing a suicidal person a noose’.
‘These loans lead to more bankruptcies and wipe out people’s savings, which is bad for the economy,’ he said.
‘This is a problem that has been caused by deregulation’ of the US financial sector in the 1990s.