COLUMBIA, S.C. – Soft music plays in the background of a new TV ad campaign as it urges viewers to only use payday loans for emergencies. One scene shows a broken-down car. Another depicts a young boy in a doctor’s office, his arm in a sling.
“Please borrow only what you feel comfortable paying back when it’s due,” says Darrin Andersen, president of the Community Financial Services Association. A new emblem will tell borrowers which lenders meet his trade group’s requirements, Andersen says in the ad.
The $10 million campaign, announced last month along with some industry policy changes, came as states from Virginia to New Mexico consider legislation to limit payday lending practices. But it’s not stopping consumer watchdogs and people already in debt from questioning the motives of an industry whose loans’ annual interest rates can exceed 400 percent.
“Payday lenders make it easy for consumers to get trapped in predatory debt,” said Teresa Arnold, legislative director for AARP in South Carolina.
Customers are supposed to repay the loan once they receive their next paycheck. Borrowers who can’t pay often “roll over” the loan repeatedly, leading to more charges that can quickly add up and lead to a cycle of debt.
Rena McFadden and her husband, Mitchell, are two people who’ve become trapped. Her husband has been dealing with lenders threatening court action unless the McFaddens quickly repay the $2,400 they owe.
“The time to repay is too short. He’s been trying to talk to them, but they won’t talk,” said Rena McFadden, a 39-year-old who works in a dry cleaning shop. “They want the money by the next payday. How are you supposed to pay your bills?”
There are more than 22,000 payday advance locations in the United States that garner $6 billion annually in revenues, according to Steven Schlein, a spokesman for the financial services association, which represents about two-thirds of payday lending companies.
The payday loan industry’s biggest change would give customers more time to pay back a loan with no financial penalty. This “extended payment plan” would be available at least once a year and provide borrowers between two and four extra months to pay off loans.
But lawmakers are still pushing changes. Eleven states already have similar interest-rate limits on payday lenders, according to consumer watchdogs, and the payday lending industry considers such rates too low to remain profitable. New proposals in 10 other states would impose similar limits, said Carol Hammerstein, a spokeswoman for the Durham, N.C.-based Center for Responsible Lending.
Hammerstein said the push for new interest rate limits comes in the wake of caps imposed last fall by Congress. Legislators put a 36 percent annual cap on loans to military service members following disclosures that thousands of troops were in debt to payday lenders.
Jamie Fulmer, director of investor relations for Spartanburg, S.C.-based Advance America, said the loans are paid back on time by the vast majority of customers and that penalties for bouncing checks or making late credit-card payments are more severe than payday loan rates.
AARP in South Carolina is not content with the industry program announced last week.
“It’s not unusual (for counselors) to see clients paying $1,600 for a $500 loan,” Arnold said.
At Fort Jackson near Columbia, the head of the installation’s consumer advocacy and financial advising programs said she knows soldiers who had been paying up to 900 percent interest on their loans.
“We’ve seen some pretty ugly cases,” said Madelyn Mercado.
Mercado said the Army has been making a big push to educate soldiers about their credit, and has speeded the process through which $1,000 loans can be made to soldiers through government-sponsored nonprofits.
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