Oct 8, 2008 7:42 pm US/Pacific
Payday Loan Customers Fall Deeper Into Debt
(CBS 5)
As the government scrambles to free up credit markets, some homeowners are extremely desperate for cash. They are turning to payday loans, only to find themselves falling deeper into debt.
Wyatt Kenoly's lender required $3,000 to restructure his home loan before he went into foreclosure. With a 24-hour deadline, he turned to payday loans. Since the fast-cash services only lend a few hundred dollars at a time he and his wife racked up 9 loans and enormous fees.
"They gave us $300, they took $300 plus $675," Kenoly said.
Kimberly Jones an attorney with the California Reinvestment Coalition said payday lenders are springing up in record numbers on the internet and in cash-strapped communities such as Stockton where foreclosures are hitting hard such.
The payday loan industry said they offer a service for consumers who need cash in that one-time emergency where a traditional bank won't help. But in reality, the Center for Responsible Lending said nine out of ten of all payday loans are made to frequent borrowers who sink deeper into debt.
"It's not an advance, it's a loan with horrific interest," Jones said. According to Jones, on average it is 450 percent APR, compared to 20 percent for a high-interest credit card.
Take one of Kenoly's $400 payday loans. Every two weeks he couldn't pay it back, the service used his bank routing number to pull $120 directly from his account over and over.
"They took $1,400 from our checking account and only stopped when we closed our bank account," Kenoly said.
While Kenoly filed a police report, Jones said payday loans are legal and taking advantage of a perfect storm: The banking industry is in turmoil. Lenders are making credit harder to get. Consumers are desperate for cash.
Kenoly was able to pay off his $3,000 in payday loans and an additional $2,000 in fees. He vows he'll never fall into that debt cycle again and warns others of the risk. "People will do anything to keep their home," he said. "They will use up all resources and if they do that, what's left?"
(© MMIX, CBS Broadcasting Inc. All Rights Reserved.)
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