Paying More For Payday Loans

What do you think is too much interest to pay on a loan? Twenty percent? Forty percent? One hundred percent? Well, believe it or not, millions of Americans are taking out small loans at rates that can reach 400 percent a year or more.

It may sound like loan sharking, but in most of America, it's perfectly legal, and part of a trend called payday lending. As reports, payday stores are among the fastest growing financial services in America -- now a $40 billion-a-year industry.

Ten years ago, they didn't exist. Now, there are more than 22,000. There are more payday stores in America today than there are McDonald's. They're making millions of loans each year, but for many customers like Sandra Harris, the fees end up bigger than the loan.

Over two years, Harris borrowed $2,510, and paid $10,000 in fees.

"Now, a lot of people are probably doing the math and they're going, 'Does she mean it the other way around?' Probably a $10,000 loan, I don't think you would pay $2,000 back in fees," says Harris. "But $2,000 to have paid $10,000 in fees..after you roll them over a couple of times. Yeah it's possible."

Harris took out her first payday loan, $500, to cover a car insurance bill. And she discovered the loans are easy to get.

You don't need credit, just a job and a checking account. You write a personal check to the payday store for the amount of the loan, and the store gives you the cash minus the fee, anywhere from 15 to 30 percent. The store holds your check for two weeks and then cashes it. If you still need the money, you write the store a fresh check every two weeks and the store keeps deducting the fees.

And that's how it was with Harris, who is a disc jockey and teacher in Wilmington, N.C. She took out several payday loans when her husband lost his job as a chef and money was tight.

"All of it sounds like, you know, quick and easy, and that's exactly what it was. But you know, nobody told you about the bad side," says Harris. "Because they wanted you to come back. That's how they made their money."

"It's not a fair fight. It's the consumer getting in the ring with Mike Tyson. I mean, we all may know the rules, it may be legal, but it's gonna be ugly the way it turns out," says Jim Blaine, chief executive of the non-profit North Carolina State Employees' Credit Union. He noticed the explosive growth of payday lending when some of his customers got into trouble.

"If someone came to you and said, 'I'm gonna take one of these payday loans out, knowing what you know, what would you tell that person?" asks Pelley.

"I'd say go get a loan shark. They're cheaper," says Blaine. "A loan shark only charges about 150 percent. Why would you go pay 400 percent? Any other choice on the planet is better. A credit card at 18 percent is better. A finance company loan at 36 percent is better. You know, borrow from mom or your uncle. Any choice is better."

"You're not equating this to loan sharking, are you?" asks Pelley.

"No, I think it's far worse," says Harris. "I wouldn't insult the loan sharks."

Harris went broke paying the fees. She was evicted from her home and her car was repossessed. What does a payday lender have to say?

"How about a thank you? How about, 'Thank you, Mr. Green or Mr. Check Casher or Mr. Payday Advance Store for helping me out when I was in a time of need?'" says Willie Green, who owns three payday stores. He's a former wide receiver for the Carolina Panthers. But now, he's on the board of directors of the national payday trade association, and is a lobbyist for the industry.

"Thanks for 400 percent?" asks Pelley.

"No, it's wouldn't have been 400 percent if she came in on time," says Green.

"Fifteen percent in two weeks becomes 30 percent a month, becomes 400 percent a year," says Pelley.

"That is correct, if you had a person taking out 26 loans a year, but that's not the case," says Green. "The average person only used this service 7.9 times a year or 6.9 times a year. So you don't have a person coming in week after week after week after week."

Green says payday stores are for short-term borrowing and it's not the lender's fault if people like Harris abuse the service: "This woman did this on her own – no disrespect to her. I feel bad for her, if this happened. But she did this of her own free will. OK? No one forced her into these stores to get these loans."

No one forced John Kucan either, but once he started, he couldn't stop. "It was almost like being addicted to it, 'cause then you get used to taking these loans," says Kucan. "I mean, that's a big word, but that's how I feel about it."

Kucan was a Connecticut state trooper until he was shot in the line of duty and disabled. He retired to North Carolina, but after a few years, his home state, Connecticut, said it overpaid his benefits and wanted the money back. He and his wife took payday loans and renewed them 15 times. They borrowed $850 and paid $2,400 in fees. "Some people would say, 'Look, 400 percent, interest on these loans? Surely you should have known better?'" says Pelley.

"That figure isn't flashing in front of you. What's flashing in front of you is the dollars you're looking for," says Kucan. "The percentage rate isn't something you're even considering at the time."

Kucan is suing the largest payday lender in the nation, Advance America. And according to former Advance America store manager Ginny McCauley, repeat customers like Kucan aren't the exception.

"The majority of them would borrow the money back right that same minute," says McCauley.

Advance America is a public company traded on the New York Stock Exchange. Last year, its revenues were up by 16 percent to $570 million. McCauley was a store manager in Illinois for six years.

"I have a problem with working for a business that wants to continue to put people in a worse position and I finally took my blinders off and decided I couldn't do it anymore," says McCauley.

Was there a lot of demand for the loans?

"People, right before payday, usually something comes up -- especially Social Security people who get paid once a month," says McCauley. "Might be the third week in the month and they need their medicine, so they would have to come borrow for those needs."

The needs of payday customers are typically too small for a bank or a credit union. But even though the loans aren't large, the fees can be huge when a customer extends the loan every two weeks, in what some call a rollover.

McCauley says 60 to 70 percent of her customers were rollovers.

"And so the rollovers would just keep rolling on and on," says Pelley.

"Right," says McCauley. "Our company's policy was, on the 15th time, they had to pay it off in full and take a 24-hour break."

And what happened after 24 hours? McCauley says, "Most of them would come right back in."

McCauley believes she was fired last year because a new supervisor thought she wasn't aggressive enough in lending. Advance America denies that, but wouldn't say anything else about McCauley except that her views don't represent company policy.

The laws on payday stores vary from state to state. Right now, 36 states regulate rollovers and fees to some degree. Other states have limits on small loans, but even then, payday lenders don't always follow the state law. Kucan and Harris, for example, live in North Carolina, a state that limits interest to 36 percent a year.

"In North Carolina, historically, we have had laws against loan sharking, and when you are talking about 450 percent interest rates, that's definitely loan sharking," says Roy Cooper, North Carolina's attorney general.

Cooper is trying to put payday lenders out of business in his state, but he says the payday stores are using federal regulations to beat state law: "They are, right now, using an out-of-state bank, claiming that they have the legal right to import interest rates from another state."

Payday stores partner with a bank in another state that allows high rates. It's possible because the Federal Deposit Insurance Corporation, the FDIC, allows it.

"The FDIC has the opportunity and the authority to put a stop to this," says Cooper. "What they need to do is step in and say 'Our banks don't need to be involved in this kind of business. It's not good for the bank. It's not good for the customer. You just shouldn't do it.'"

The FDIC declined to talk with 60 Minutes Wednesday on camera. But this spring, it did tighten its guidelines warning banks payday loans "can create serious financial hardship." The FDIC says a consumer shouldn't continue payday loans more than three months a year. In other words, no more than six loans.

"The FDIC says more than six can create serious financial hardship for the borrower," says Pelley.

"Could," says Green. "It didn't say it did. It said it could."

Green is lobbying the North Carolina legislature for a state law that would legalize payday stores and limit the number of loans to 12 a year. That would cut the fees down to 210 percent.

"If your wife came home, and told you she took out a loan at 210 percent, you'd blow your top," says Pelley.

"My wife wouldn't do it," says Green. "Because my wife, thank God, is in a financial situation where she wouldn't. Plus, she has a master's degree in accounting."

"You are not saying she's too smart to do this, are you?" asks Pelley.

"And she's got excellent credit," says Green, who is the only payday lender who would talk to 60 Minutes Wednesday on camera. He said for someone strapped for cash, payday loans can be cheaper than the alternatives.

"Eliminate payday lending. What do these people have?" asks Green. "Bounced checks, cars being re-poed, furniture being re-poed. God forbid, an emergency comes up where the refrigerator goes out or the child needs to go to the doctor. Who's gonna help them?"

So how could this happen to Harris?

"Well, we all have financial problems in one way or another," says Harris. "And unfortunately, the companies, instead of trying to help me to try to look at, 'OK, Miss Harris, let's look at your situation. Have you thought about going to credit counseling?' They encouraged me to come back."

Harris did end up in credit counseling, and, after five years, she told us she'd paid off almost all of her payday loans -- almost.

"I am down to one payday loan," says Harris. "That loan was $300. And they take $54 out every two weeks."

She's paying $1,200 a year for a $300 loan. "Because I can't pay it back," says Harris. "It's like walking through a spider web and trying to get all the web off of you. I can't get out of it."

Sandra Harris called to let 60 Minutes Wednesday know she finally paid that last loan. It's worth noting that Harris took out some of her payday loans online. There are hundreds of Internet sites offering payday loans at the same high rates, and states are just beginning to take legal action against these lenders. Customers give the online stores access to their checking accounts and the fees are deducted electronically.