Some storefront businesses in the USA are evading state laws banning "payday" loans, made to tide people over until their next paychecks at punishingly high interest rates, the Consumer Federation of America said in a recent survey.
The small, short-term loans to cash-strapped people, often made by check-cashing businesses, have become a booming business nationwide, estimated by the consumer group at $1 billion a year. Stand-alone outlets specializing in payday loans also have sprung up, often in poor neighborhoods.
"Consumers who have maxed out their credit cards are turning to payday loans for quick cash," Jennie Fortner, the group's director of consumer protection, told a news conference. She called the practice, which is legal in most states, "the modern-day equivalent of loan sharking."
An official of the National Check Cashers Association, a trade group representing the businesses, maintained many consumers use payday loans only for emergency needs. They provide convenient short- term credit, said Robert Bochfort, the group's deputy general counsel.
With the payday loans, a consumer gives the check casher or payday lender a postdated personal check and receives a small cash loan. The check casher or lender holds the check until the customer's next pay day, when the customer can do one of three things: allow the check to be cashed, redeem it by paying cash to cover the loan plus a fee, or roll it over by paying the fee to extend the loan for another two weeks or so.
Typically, interest rates charged are equivalent to 391 percent or 780 percent a year, depending on how many days the loans are made for and whether they are rolled over because the borrower can't afford to pay them off.