As hundreds of thousands of American homeowners fall behind on their mortgage payments, more people are turning to short-term loans with sky-high interest rates just to get by. While hard figures are tough to come by, evidence from non-profit credit and mortgage counsellors suggests that the number of people using these so-called ‘payday loans’ is growing as the US housing crisis deepens, a negative sign for economic recovery.
“We’re hearing from around the country that many folks are buried deep in payday loan debts as well as struggling with their mortgage payments,” said Uriah King, a policy associate at the Centre for Responsible Lending (CRL). A payday loan is typically for a few hundred dollars, with a term of two weeks, and an interest rate as high as 800 per cent. The average borrower ends up paying back $793 for a $325 loan, according to the Centre.
The Centre also estimates payday lenders issued more than $28 billion in loans in 2005 - the latest available figures. In the Union Miles district of Cleveland, which has been hit hard by the housing crisis, all the conventional banks have been replaced by payday lenders with brightly painted signs offering instant cash for a week or two to poor families.
“When distressed homeowners come to us it usually takes a while before we find out if they have payday loans because they don’t mention it at first,” said Lindsey Sacher, community relations coordinator at non-profit East Side Organising Project on a recent tour of the district. “But by the time they come to us for help, they have nothing left.”
The loans on offer have an annual percentage rate (APR) of up to 391 per cent - excluding fees and penalties. All you need for a loan like this is proof of regular income - even government benefits will do. On top of the exorbitant cost, payday loans have an even darker side, Sacher notes. “We also have to contend with the fact that payday lenders are very aggressive when it comes to getting paid.”
Ohio is on the front line of the US housing crisis. According to the Mortgage Bankers Association, at the end of the fourth quarter Ohio had 3.88 per cent of home loans in the process of foreclosure, the highest of all the 50 US states. The ‘Rust Belt’ state’s woes have been further compounded by the loss of 235,900 manufacturing jobs between 2000 and 2007.
But while the state as a whole has not done well in recent years, payday lenders have proliferated. Bill Faith, executive director of COHHIO, an umbrella group representing some 600 non-profit agencies in Ohio, said the state is home to around 1,650 payday loan lenders - more than all of Ohio’s McDonald’s, Burger Kings and Wendy’s fast food franchises put together.
“That’s saying something, as the people of Ohio really like their fast food,” Faith said. “But payday loans are insidious because people get trapped in a cycle of debt.” It takes the average borrower two years to get out of a payday loan, he said. Robert Frank, an economics professor at Cornell University, equates payday loans with “handing a suicidal person a noose” because many people cannot control their finances and end up mired in debt.
“These loans lead to more bankruptcies and wipe out people’s savings, which is bad for the economy,” he said. “This is a problem that has been caused by deregulation” of the US financial sector in the 1990s. Because of the astronomical interest rates there is a movement among more states to implement a cap of 36 per cent APR that is currently in place in 13 states and the District of Columbia.
“Thirty-six per cent is still very high,” said Ozell Brooklin, director of Acorn Housing in Atlanta, Georgia where there is a cap in place. “But it’s better than 400 per cent.” But even in states like New York where payday loan caps or bans exist, loopholes allow out-of-state lenders to provide loans over
the internet.
Janet Hudson ran into payday loans when she and her fiance broke up, leaving her with a young son and a $1,000 monthly mortgage payment. Short on cash, she took out three small pay-day loans online totalling $900 but fell behind with her payments. Soon her monthly interest and fees totalled $800.
“It almost equalled my mortgage and I wasn’t even touching the principal of the loans,” said Hudson, who works as an administrative assistant. After falling behind on her mortgage, Hudson asked New York-based non-profit Empire Justice Centre for help. A lawyer at Empire, Rebecca Case-Grammatico, advised her to stop paying off the payday loans because the loans were unsecured debt.
“For months after that the payday lenders left me voicemails threatening to have me thrown in jail, take everything I owned and destroy my credit rating,” Hudson said. After several months, the payday lenders offered to reach a settlement. But Hudson was already so far behind on her mortgage that she had to sell her home last April to avoid foreclosure.
source:http://www.7days.ae/en/2008/03/25/payday-mayday.html
