Quick Money ­ Payday and Title Loans

BROOKINGS, S.D. -- People seek out the services provided in money stores rather than traditional financial institutions for a variety of reasons, a South Dakota State University specialist said.

Some people do not have access or cannot afford to use banks because of rising fees or the inability to maintain the required minimum balance.  Others have privacy concerns or do not want their funds accessible to creditors.  As a result, many use quick loan outlets for the convenience, SDSU Extension Family Resource Management Specialist Liz Gorham said.

Quick loan outlets have grown in the past 10 years.  The number of payday lenders alone has grown nationwide from 300 in 1992 to nearly 8,000 in 1999 and was expected to grow to 25,000 outlets serving 35 million households by 2002.

Payday lenders accept post-dated checks and title lenders hold car titles as security for loans.  Some lenders offer a variety of personal loans at unreasonably high interest rates.

Responsible lenders believe they are providing a needed service to a targeted audience that could not, under normal circumstances, qualify for small, short-term loans.  They help consumers avoid late fees on bills and fees on bounced checks.  They justify charging high fees for their services because their audience is at high risk for debt non-payment. Consumers who seek quick loans rarely complain about the high costs for they become dependent on the industry for a quick source of cash.

The convenience of getting a quick loan comes at a high cost to a consumer.  According to Gorham, it is similar to buying groceries at a convenience store instead of the supermarket.

Consumers pay a fee for the service. The average fee in Sioux Falls on payday loans is 17.5 percent for two weeks (or 35 percent per month). When the consumer cannot repay the loan within the two-week period, they may request one or more extensions of the loan. With each extension, the interest rate escalates rapidly. The consumer soon owes more in interest and fees than the original loan amount.  It becomes serious when the consumer fails to make a payment and is forced to borrow additional funds (at the same or higher rate of interest) to pay off the original loan.

Prior to the last legislative session, South Dakota had no rules restricting quick cash loans.  Without a usury law to limit the rate of interest charged on loans, quick loan businesses can set the limit they think the consumer will be willing and able to pay.  All too often the user of quick loans does so without full knowledge of what they are paying for the service.

Starting July 1, operators making payday loans will be limited to holding post-dated checks for no more than $500.  In addition, they will be limited to the granting of four extensions on the payday loan.  This legislation does not cover title or other short-term loans.  No other segment of the quick loan industry received regulation this year, but more study is planned for the 2003 legislature.

Here are some tips for consumers considering quick loans:

* Consider other alternatives before relying on a quick loan at the money store.

* Make a realistic budget.  Build up savings by depositing money into an interest-earning account for emergencies and unexpected expenses.

* Negotiate payment with creditors in a one-time situation ­ ask for a deferred or partial payment privilege.  Late fees or deferred payment fees may be far less costly than a quick money loan.

* Check with your employer about a one-time possible pay advance.

* Borrow from a friend or family member but remember to pay them back promptly and in full.

* Check into overdraft protection.  Such fees can cost you substantially less than taking out a quick loan.

* Do not assume that you cannot use a traditional lending institution.  Avoid high fees by opening a basic checking or savings account at a bank, credit union, or savings and loan.  Shop around for small loans at reasonable rates.  If possible, consider taking a cash advance on a credit card with lower interest rates.

* If committed to seeking the services of a quick money lender, check with two to three lenders for the best deal.  Ask for the annual percentage rate (APR) charged and the fees in dollar amounts so that you can compare one business offer with another.  The higher the APR, the higher the fee, the longer the period to repay the loan, and the more loan extensions requested are all factors that contribute to higher cost loans.

* When using the services of a quick money store, get a receipt stating the amount of the check you cashed and the fee you were charged.

If you have a problem with the business that you cannot resolve, contact a consumer credit counselor, the South Dakota Division of Consumer Protection at 1-800-300-1986, or South Dakota Division of Banking at (605) 773-3421.
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Contact: Liz Gorham, (605) 688-4035
** For links to other sites showcasing SDSU's work in teaching, research, and Extension, visit http://sdces.sdstate.edu.

Wendy Mohrhauser, Intern
AgBio Communications Unit
South Dakota State University
ACC, Box 2231, Rm 200
Brookings, SD 57007
Telephone: (605) 688-5795