Payday Loan Disaster: Vacation Madness Leads to 651% Interest Rate

It was the generosity of the vacation that ultimately led Tyrone Newman to strike a desperate deal.

And who could blame him?

He had been fired and unemployed for a year, picking up the children and doing laundry while his wife worked as a security guard. So you can see why a 47 year old man would want to celebrate a bit after a good, long year in a solid job.

” I did everything. I bought a tree this time. We had a turkey with all the trimmings, ”Newman told me, his golden eyes widening as he explained the extent of his loss. “You know, you’re happy and you start spending. “

All told, the maintenance worker at an apartment building in Northeast Washington is over the mark by about $ 1,500.

In January, he didn’t want his wife to know he spent the month’s mortgage payment on Christmas presents. Stuck in traffic on the way to work, the radio spoke to him.

“Get money NOW! Bad credit? NO PROBLEMS! “He remembered the booming voice on the radio speaking directly to him. He called. And within hours, $ 500 was in his bank account.

The interest rate? 651%.

But $ 500 was not enough.

“No problem!” the payday lender told him over the phone. A sister company could bring him more money. Another call, another rapid storm of conditions, tariffs and restrictions. Newman gave them his bank account numbers and, zap, another $ 500 was in his account.

He made the mortgage payment and finished.

Then the interest charges and the “loan renewal option” fees started to add up. The calculation was overwhelming.

If it took him a year to pay off just one of those $ 500 loans, it would become about $ 6,000. Three loans and Newman’s relatively modest Christmas (by most American standards) would cost him $ 18,000.

This situation, unfortunately, is not so unusual for workers like Newman, who earns around $ 16.50 an hour. Their life can be a Sisyphus struggle, relentless and utterly ruthless when it comes to mistakes.

And guess what? The loans were completely legal!

“These triple-digit rates are worse than any loan shark,” said Kathleen Day, spokesperson for the Center for Responsible Lending, an advocacy group. “And they prey on the most vulnerable.”

In 2007, the District worked hard to end payday lenders in the city. Council members Mary M. Cheh (D-Ward 3) and Marion Barry (D-Ward 8) sponsored a bill to eliminate them by capping interest rates – no more than 24% on a loan.

It went 12 to 1, with Barry, oddly enough, being the only member to vote against.

Similar legislation has been enacted in Maryland, Virginia and a dozen other states to impose double-digit caps on lenders. But Newman’s loans did not come from any of those places.

Because an interest rate of 39% – scary as it sounds to most people – isn’t enough for payday lenders, most of these outfits have turned to car title lending. (they can take your car) in Virginia, which was not regulated until the state enacted a law in 2010.

If you need more evidence that this industry targets the desperate, take a look at Military Loans Act, passed by Congress in 2007, to protect military families from predatory lenders who set up shop near military bases.

But it turns out that it’s not enough just to get rid of those run-down payday loan windows – the ones that are usually stuck between a liquor store with bulletproof plexiglass and a Chinese restaurant and sub- sailors – not enough.

At least one of Newman’s lenders was located on an Indian reservation in Michigan. (Just this week, the Federal Trade Commission expanded his case against a payday loan transaction who was suing clients in a South Dakota tribal court.)

Go online, search for “payday loans“, and they’re everywhere; the only downside of the online model is that you can’t buy lo mein gras after signing a deal with the devil.

But perhaps even more troubling is why a coalition of around 250 consumer advocacy groups, along with the Center for Responsible Lending, addressed to federal bank regulators last month.

Apparently, usury is too delicious a business model to be left with two-bit lenders. Looks like some banks are doing it too. Wells Fargo, Regions, US Bank, Guaranty and Fifth Third Bank have all started offering short-term loans at triple-digit rates, according to a letter sent by advocacy groups.

You might even be able to live with the idea that high fees for quick cash are tolerable when people are strapped for cash. But it’s rarely a quick thing.

“These things are like cobwebs. They’re sticky and hard to get rid of, ”Day said of payday loans.

Indeed, whenever Newman tried to pay more than the monthly rate, the lenders encouraged him to keep his money.

“They were trying to keep this money, keep me, and keep pumping me money,” Newman said.

Newman got a bailout. His boss, who told me about the situation, gave Newman the money to pay off the loans and worked out a reasonable repayment plan.

The $ 1,500 loan cost Newman $ 450. The outcome was no worse because he asked for help. He fears that many other people who listen to his radio station will be sucked in.

“I have to tell people to stop. ‘Thought. Slow down. Sit down. Don’t do it, ”Newman told me. “These loans are addicting. I always ask myself, ‘Who is going to lend me?’ and all of a sudden – Bam! – here’s someone who will.

He looked down at his lemonade, patted the ice cubes a bit with his straw, and confessed, “I haven’t told my wife about loans.” And that’s all you need to know. Whatever you need to hide from your wife has to be bad news.

To read Petula Dvorak’s previous columns, visit washingtonpost.com/dvorak.

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