By Jim Butts
November 25, 2006
A new report is warning money-strapped Christmas shoppers not to be tempted by offers for fast cash this holiday season, or they could end up with a very unhappy New Year.
The report criticizes the practices of payday loan companies – an industry popular in the Sauk Valley – claiming they are exploiting a loophole in a new Illinois law meant to keep customers out of insurmountable debt.
That law, the Payday Loan Reform Act, took effect this year after unanimously passing the Illinois House and receiving only one "nay" vote in the Illinois Senate. The PLRA offers consumer protections on short-term payday loans by capping fees and mandating a "debt-free recovery period or repayment plan" after 45 days of continuous indebtedness, to give borrowers a chance to catch their breath and break the cycle of debt.
Released in October by the Monsignor John Egan Campaign for Payday Loan reform, the new report, titled "Hunting Down the Payday Loan Customer," claims that in response to the new law, many payday lenders have switched most, if not all of their business, from the usual two- or four-week payday loan to longer, more expensive installment loans that typically last about 140 days. The PLRA only regulates loans of 120 days or less.
The longer loans come with interest rates many times well above 300 percent when calculated as an annual percentage rate, according to the report. In addition, the borrower's fees aren't capped, and no "debt-free recovery period" is guaranteed if the borrower can't make the payments.
Often, a borrower will take out another loan to pay the money due on the first one, creating a spiral of debt, the report said.
Beside warning consumers, the report also calls on the Illinois Legislature to change the law.
"… companies offering unregulated payday installment loans are offering an expensive and dangerous product, and these new loans should be subject to the same strong consumer protections passed by the General Assembly for traditional short-term payday loans," states the report.
Payday industry spokesman Tony Colletti defended his industry's practices, saying payday lenders offer an important service to those who might not have anywhere else to turn in a cash emergency.
"If that's your choice, get a loan or write a bad check, it's always better to get a payday loan," said Colletti, executive vice president of the Community Financial Services Association.
As for changing the law, Colletti said his group, which is a national association of payday lenders, worked to pass the PLRA and would support legislation to regulate longer-term installment loans.
Colletti said he's worked with the Egan Campaign and legislators to pass fair regulations, and outlawing the industry completely, as has been done in some states, would be a mistake.
"What do you do with this market? Because clearly there's a huge market for short-term loans," Colletti said. "Demand isn't going to go away. We just have to find a way to meet it that gives people sufficient protections and benefits from the service."
Advance America, which has two locations in Sterling and one in Dixon, is a member of Coletti's group. When asked about the new report, Advance America in Sterling referred comment to the group, and several other of the dozen or so local payday lenders either declined to comment or referred calls to their corporate organizations.
Although Colletti said his group would support legislation to regulate installment loans, at the Advance America, the offer of a "$25 cash bonus" for opening up an installment loan was part of the greeting given to callers.
Incentives such as the $25 bonus have become commonplace in Illinois as a way to lure customers into taking out a higher-profit installment loan, said Marva Williams, one of the reports' authors. Williams works for the Chicago-based Woodstock Institute, whose mission is to research, develop and promote ways to bring economic resources to lower-income and minority families and communities.
"They will give misinformation to borrowers, erroneous information on interest rates of shorter-term loans to make it look like it's more expensive than the longer-term loans," Williams said.
The report specifically criticized "The Cash Store" and "Americash" for allegedly targeting low-income, minority communities and using over-aggressive collection practices to get the maximum amount of cash from their customers.
It is easy to get sucked into debt by payday companies, Williams said – many of the highly visible companies can approve a loan with little hassle in about 15 minutes, no matter what a person's credit history.
"That's the advantage they have- they can move so quickly and they're so convenient. They're on every street corner," she said.