The seedier side to online loan lending

Payday loans horror stories are common-place these days, it is a clear message of stay away! So when a single mother, AzlinahTambu, who is 22 years old, from California, was in a problematic situation recently. She had broken down her car while she had to use it for dropping her daughter to daycarecenter and then going to her workplace. Tambu, a woman with really a dazzling personality, had no money for getting the car repaired. She didn’t have any credit card or savings; there weren’t any friends or family to help her out either. Hence, she opted the route which large amount of people with low income chooses in similar situations: she went for 5 payday loans through different payday lenders and the amount for each loan was between $55 and $300. $15 per $100 was the fee for taking these loans.

Read the terms!

The lady was aware of the fact that she won’t be able to repay the amount in time through her paychecks as she had to spend everything on paying for different utilities and rent and for buying food. However, there are states by which lenders are allowed “rolling over” and refinancing loans, but that’s not the case for California. Tambu paid initial loans back and after that she had to borrow more – from same lenders, while paying more fees — extending the length of first loans effectively. At the time when lenders wanted to get their money from the checking account of the lady, there weren’t enough funds and they had to face overdraft fees which became $300 quickly. The overdraft charges were paid by her and then she opted to close the account.

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According to the consumer advocates, such situations are exploited by the lenders as they are completely aware of so many borrowers who won’t be able to repay their loans at the time they’re due. As old loans are rolled over by borrowers, or new loans are taken right after paying first ones back, it’s argued by advocates; they fall prey to debt cycle and end up paying far more as compared to the borrowed amount. The payday lenders often stand by their products and stay as the last choice for borrowers such as Tambu, with no other options left.

What are options?

When the loans are being defaulted for California borrowers, there aren’t many options left for lenders in collecting their debts. An agreement of arbitration is signed by borrowers at the time of applying the loan and the lenders aren’t able to take this issue to the court. Harassing calls over the phone were the option taken by on lender of Tambu, which violates federal law, but she was aware of her rights. She said, “I am not stupid and they can’t take this matter to the court”.

image012When this happened, Tambu met me as we had been working alongside each other at the Check Center who is a payday lender and check casher in downtown Oakland, the low-income neighbourhood. I worked for a couple of weeks back in October in the position of collections agent and teller in one of the research projects designed for getting a better understanding on the fact why check cashers and payday lenders are used increasingly by Americans. Prior to this, I worked as teller for 4 months at check casher based in South Bronx. Besides, I have a month of work while staffing ‘Predatory Loan Help Hotline’ in ‘Virginia Poverty Law Center’ I used to sit with Tambu in sun right outside our building in coffee or lunch breaks. As I shared my research with her, she told her story voluntarily about ending up taking and giving out the loans herself.

The customers at Check Center used to come to her and she knew them closely as well while often greeting them in way to ask about the jobs and the children. She was serious about her job and did it good. But still she got something like a minimum wage from the employer and she hadn’t earned much to meet her unexpected expenses such as illnesses and car repairs.

Advice from the industry

According to payday loans website Simple Payday a financial literacy can help Tambu and other such people avoid from the payday loans. Financial education can be deemed necessary as well. But the fact remains that comprehending the situation at your end won’t change the options that are feasible in your case. Tambu knows that such loans can increase the problems further. In fact, most customers do! Every day she comes across customers paying one of their loans and getting another immediately. According to her, she was aware of the risks and what these loans are all about. But she says that she has to deal with month-to-month issues and at times the only option left to her is taking loans. Even though her neighborhood is dangerous, she’s living in best apartment that I have ever come across. She couldn’t let this home go just for not paying its rent. She told that if it’s bad in your opinion then look at the area around Check Center having drug dealers everywhere and bullet holes perforating storefront and imagine where I live.

Should they be banned?

Businesses offering payday loans are regularly demonized by policymakers, journalists and researchers by portraying them to be the worst option. But if you haven’t experienced a worst condition then you may not be able to understand why people opt for borrowing small amount for high price. Till now, everything told on payday loans has revolved around their supply side – the lenders – while not on demand side – borrowers. But now research on borrowers has been on the rise. Different categories have been identified in one recent report explaining such borrowers. Tambu doesn’t represent the whole market, but the research says, borrowers looking for such loans to fulfill unexpected needs constitute only 32% of complete market. The focus of policy recommendations is on industry regulation instead of conditions due to which people look for small and expensive loans.

There are lenders who get involved in some abusive practices. When I staffed at Predatory Loan Hotline, I came across so many stories where people had been threatened about lawsuits which regularly disobey the existing regulation.

In fact, it’s recognized by those working in industry that such loans aren’t the right solutions for growing small loans’ demand. John Weinstein, check casher from third generation and Check Center President, told that he knows problems that are linked to repeat borrowing. According to him, changes must be made to this industry. However, when the window was staffed at the Check Center by me, I had to convince the customers to go towards smallest loans for fulfilling their needs. While I was working as collections agent, it was necessary for me to go through ‘Fair Debt Collections Practices Act’ by which lenders are regulated on what can be done for recollecting their debts.

Demand has increased!

There might be an increase in demand of the small loans as the payday loans are available more easily now. But what contributes more is that more and more people fail to meet their needs. Since 1972, wages have seen a decline and vast majority of people from U.S. don’t have any emergency savings. This encourages the need of payday loans as Americans don’t have sufficient salaries for fulfilling their basic needs and almost nothing can be put aside for hard times. Major financial services have abandoned groups with low or moderate income as well. Those with low incomes don’t find enough incentives for saving and investing as do those with higher income.

Repayment plans was the last option for Tambu allowing her to repay the loans in instalments. She opted for another job in midnight for repayments. According to her she repaid a major portion but then had to let that job go due to the tough routine. But she was willing to go back as she needed money badly. When we talked last time, she shared another job she was doing recently at veterinary hospital. She considered it as her career. She thinks she’ll finally be able to put $25 aside every month while she may also be able to start some classes at some local college for her counselling degree.

Life goes on

She hasn’t yet finished paying back what she had borrowed for getting her car fixed and visits all the lenders on every Wednesday and pays $20 to each of them. When she was asked whether these loans should be banned in California, like in New York, she said no, they should be allowed. It’s impossible to take 5 loans together and then payback in time but there are situations when you don’t have any other option. She said she’s working hard for repaying them due to the fact that if she needs some more she might not be able to get it in case she doesn’t repay.