Two years ago, you couldn't drive more than a mile in some parts of Portland without seeing half a dozen store fronts advertising easy, quick cash. All you had to do was pay 521 percent annual interest (APR) and the cash was yours.
You had two weeks to pay it back, lest you be charged even more. Most couldn't.
In April 2006, Gov. Ted Kulongoski signed into law new regulations that limited loans to no more than a 150 percent APR and increased the amount of time you had to pay back the loan from two weeks to 31 days.
When the law took effect in July 2007, it had an almost immediate effect on the number of payday loan companies operating in the state. Before, there were 360 licensed payday lenders in Oregon — that number was down to 82 in September, 2008.
So where have their former clients turned for ready cash? Many have found no alternative, according to a new study by Dartmouth College's Jonathan Zinman.
According to the Zinman's study, 70 percent of respondents didn't know where to go or went nowhere for loans; 8 percent used a bank or credit union; and 15 percent were forced to use pawn shops, credit cards or car title loans in the absence of payday loans. Many of the 70 percent, Zinman says, ended up paying more in overdraft fees and late fees. He estimates that in some cases, people ended up paying more than they would have, had they had access to payday loans, although he says that situation could change, given time.
"Borrowers may need time to adjust to the new regime," writes Zinman. "Much work remains to address the questions of whether access to expensive credit improves (consumer) welfare, and why."
But he says many people may be better off without access to expensive consumer credit.
"Several studies find that access to expensive credit exacerbates financial distress," Zinman writes. "These findings suggest that psychological biases lead consumers to do themselves more harm than good when handling expensive liquidity, and hence that restricting access will help consumers by preventing overborrowing."
Poverty, Payday Borrowers
The study compared people in Oregon and Washington, where there was no change in regulations for payday loans.
Many states have no payday loan regulations, and Zinman estimates in the U.S. there are more payday loan shops than McDonalds and Starbucks combined. Many payday borrowers also depend on government assistance.
"Many payday borrowers are served by social programs like Food Stamps and the Earned Income Tax Credit, and annual payday loan volume of $40-$50 billion now exceeds the annual amount transferred by those programs," Zinman writes.
Rep. Jeff Merkley spearheaded the regulation legislation, which was co-sponsored by State Rep. Chip Shields, among others. Shields said people still have access to short-term loans, the stores just aren't on every other block anymore, adding that the next step is to go after unreasonable overdraft fees and other unscrupulous banking practices.
"People are starting to get it," Shields told The Skanner. "We need to rein in the financial industry so we don't go into a depression every time they make mistakes."
What many former payday loan customers don't know, as Zinman's study shows, is that credit unions offer similar loans at cheaper rates.
"Credit unions offer a short term loan product," says Pam Leavitt, senior vice-president of government affairs for the Credit Union Association of Oregon. "We did it before and after (the regulations were passed)."
Unlike the strip mall store advertising fast cash in large letters, most credit unions fell under the radar of payday loan customers, despite offering loans at 18 to 21 percent APR, with no fees and no credit checks. While exact products differ for each credit union, Leavitt told The Skanner that for members of her association the intent was always the same – to provide access to credit to low-income people at a low cost.
"They (credit unions) lose money on these products and continue to provide them," she said.
Advertising such services is always an uphill battle, Leavitt says. When the regulations first went into effect, public service announcements and limited advertising were launched, but the resources needed for a comprehensive advertising scheme aren't there for credit unions – which are nonprofit, member-owned collectives.
Bob Corwin, executive vice president and chief operating officer of First Tech Credit Union, says they have seen a doubling of interest in small payday-style loans, but haven't had much success in helping people manage their credit.
The Payday Trap
Corwin sees how easily people can fall into the payday loan trap. Despite charging interest similar to a credit card and extending the loan term to 31 days with no fees, about 90 percent of those customers requested rollovers on the loan terms.
In other words, at the end of the month, only 10 percent of customers who took out a loan of $200, on average, could pay it back.
"Payday lenders charged a lot of money," he said. "There's a reason they charged that much. … From a true credit perspective, these are probably loans that should not be made."
A 2006 study found similar rates of serial borrowing. A report co-authored by Washington State University Sociology Professor Clayton Mosher found that a lot of payday loan business comes from loan rollovers. That report also found that Washington state payday loan operations are predominately located in low-income, minority neighborhoods, as well as near military installations.
Despite a seeming over-reliance on expensive, short-term loans, these same customers showed no interest in getting free credit counseling – a meeting that could help them secure lower-cost loans and end reliance on payday loans.
"Just ask me how many people signed up for credit counseling," Corwin said. "Zero."
Looking into a future with those kinds of loan default numbers, First Tech – and many other Oregon credit unions — decided to offer different options.
Four months ago, First Tech began offering loans for under $500 with a year-long term to repay. Corwin says the program has been successful so far, but he says it may be too soon to tell. Will the loans actually help people get into a lifestyle that matches their income? Or will it mean more loans at the end of the year?
"In general, people taking advantage of payday loans were just postponing the inevitable," Corwin said. He said he remains "cynically optimistic" that the new year-long loan program will help people.