When a paycheck doesn't stretch far enough, payday lenders offer short-term loans to fill the gap  MAP:    Map of states allowing payday loans

June 25, 1999
Web posted at: 11:47 a.m. EDT (1547 GMT)

In this story: How it works Paying more in fees than for the loan When used correctly, a 'viable option' RELATED STORIES, SITES

LOS ANGELES (CNN) -- Janet Delaney and Sibylle Williams have steady jobs, but when their paychecks didn't stretch far enough, they were bailed out by lenders offering "payday loans." For both women, the financial rescue came at a very high price -- literally.

Payday loans are short-term borrowing, that, if not paid off quickly, can lead to interest rates that are triple-digit -- and higher -- when calculated on an annual percentage rate (APR).

It works like this:

• You want money today, but payday is a week or two away.
  
  
• You write a check dated for your payday and give it to a check-cashing outlet.
  
  
• You get your money, minus a fee (usually about $15 per $100 borrowed).
  
  
• In two weeks, the check-cashing outlet does one of two things:
  
  
  • Cashes your check.
    
    
  • Lets you pay another fee to renew the loan for another two weeks.

In less than a decade, payday lenders have created a profitable and fast-growing industry and have overcome challenges by lawsuits and states that call their interest rates illegally high.

They've persuaded 19 states and the District of Columbia to exempt them from laws that limit interest rates. Montana and Utah will soon join that list.

Williams says she was paying off one payday loan with another 374K/12 sec. AIFF or WAV sound

The remaining states have either banned the practice, or have no laws addressing it.

Delaney found out how payday loans work when she needed $200 to pay her bills.

A storefront loan office, called "Check Into Cash," let her write a check she couldn't cover and gave her $200 on the spot.

They agreed not to cash it until her next payday -- for a $38 fee.

When payday came, the $16,000-a-year hospital food service worker didn't have $200 to spare.

No problem, the payday lender said, pay another $38 and you're off the hook until next payday. A year later she had paid $1,220 in fees. And she still owed the $200.

"I had to write a check to pay my light bill, my phone bill. That's the way it went every two weeks," said Delaney, who lives in Cleveland, Tennessee.

Williams, a security guard in Berkeley, California, admits she got in way over her head. "By the time it is over," she told CNN, "you are paying more in the fees than you are in the loans."

Nix says payday loan services can be a viable solution to unexpected money emergencies 374K/11 sec. AIFF or WAV sound

Some borrowers, such as Williams, take out numerous payday loans from different check-cashing establishments. But even if the borrower uses just one lender, the longer it takes to repay, the more the interest rate rises.

In extreme cases, it's possible for the APR to top 2,000 percent.

But lenders say that APR is a poor measure of payday loans because most borrowers repay them in weeks, not years. "Any time you take a short-term fee and convert it into an APR, it's going to exaggerate the cost of the product," says Sam Choate, Vice President of Community Financial Services Association.

Consumer advocates, however, argue that the APR is the standard measurement used to determine the fairness of any loan, regardless of its length.

As the debate goes on, some payday lenders are going after new clientele -- college students and military personnel.

After all, they serve a legitimate need, says Tom Nix, who runs a check-cashing company in California.

"It's designed for someone who has a bank account, finds themselves in the need of emergency cash and, when used correctly," he told CNN, "it's a very viable option."

Correspondent Charles Feldman and The Associated Press contributed to this report.

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