The number of check-cashing, payday lending businesses is exploding in Ohio, giving those who need quick cash more choices than ever.
But this convenience is causing consumer advocates to worry.
Statewide, the number of such businesses has increased more than 700 percent, from 62 to 511 said Bill Teets at the Ohio Department of Commerce, which began regulating the industry in late 1995 following myriad customer abuses. Almost 20 percent of the businesses in Ohio are in the Miami Valley, he said.
Payday lending executives say the flourishing industry is a convenience to those who need fast, hassle-free cash. The businesses also meet a demand left by what payday loan officials believe is a dearth of neighborhood banks that offer easy, short-term loans for small sums of money. The higher payday loan costs, they say, cover administrative expenses and defray the losses from "extremely high" default rates. In addition, payday loans are high-risk and with high- risk loans come higher interest rates, loan officials explained.
Consumer advocates don't buy the argument, calling the businesses "legal loan sharks" that have infested Ohio's financial waters. Advocates contend that many borrowers, who typically live hand-to- mouth, end up on a debt treadmill that can end in bankruptcy. State regulations allow payday loan businesses to charge "exorbitant, triple-digit interest rates" and "high" loan origination fees, said Jean Ann Fox, director of the Washington, D.C.-based Consumer Federation of America. This month the non-profit group updated The Growth of Legal Loan Sharking: A Report on the Payday Loan Industry .
"This is really dangerous debt," Fox said. "Not only that, but these (loans) are designed to keep you in perpetual debt. They end up in bankruptcy. These (loans) aren't designed for you to pay them off and walk away successfully."
Although critics didn't have precise figures on bankruptcy rates, they said the door they leading to perpetual debt is easily entered.
In less time than it takes to get a driver's license, a person can go to a payday loan center and borrow up to $500. Unlike at banks, where scrutiny can be intense, the borrower need only present a government-issued ID, a paycheck stub and a post-dated check and loan officials will show him the money. No credit checks. No questions.
To take out a two-week $500 loan, the borrower would give the merchant a post-dated check (usually for the day of the borrower's next payday) for $575. That is $500 for the amount of the loan, $50 in loan origination fees and $25 in interest.