"Pay day" loans exacerbate housing crisis
Updated: 2008-03-24 09:30
Bill Faith, executive director of COHHIO, an umbrella group representing some 600 nonprofit agencies in Ohio, said the state is home to some 1,650 pay day 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 pay day loans are insidious because people get trapped in a cycle of debt."
It takes the average borrower two years to get out of a pay day loan, he said.
Robert Frank, an economics professor at Cornell University, equates pay day loans with "handing a suicidal person a noose" because many people can't 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 percent APR that is currently in place in 13 states and the District of Columbia.
"Thirty-six percent 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 percent."
Springing the trap
But even in states like New York where pay day loan caps or bans exist, loopholes allow out-of-state lenders to provide loans over the Internet.
Janet Hudson, 40, ran into pay day 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 totaling $900 but fell behind with her payments. Soon her monthly interest and fees totaled $800.
"It almost equaled 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 Rochester, New York-based nonprofit Empire Justice Center for help. A lawyer at Empire, Rebecca Case-Grammatico, advised her to stop paying off the pay day loans because the loans were unsecured debt.
"For months after that the pay day lenders left me voice mails threatening to have me thrown in jail, take everything I owned and destroy my credit rating," Hudson said. After several months, the pay day lenders offered to reach a settlement.
But Hudson was already so far behind on her mortgage that she had to sell her home April 2007 to avoid foreclosure.
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