Special Report: California Loan Traps
It's a trap millions fall into every year, and have a tough time getting out of… the payday loan trap.
FOX26 News reporter Alex Lehnert investigates, and uncovers, the jaw-dropping numbers that will have you thinking twice about ever taking out a payday loan.
They're advertised as the solution to your problems, the quick cash fix you may need in the event of emergency.
But studies show more often than not, taking out payday loans can put you in a hole so deep you may have an impossible time digging yourself out.
As a credit counselor, Cara Pierce says she sees it more often than not, people desperate to get out of what is often described as a vicious loan cycle. "It's kind of like legalized loan sharking in a way. You're left to the options that are open to you," said Pierce. "What ends up happening is they rob peter to pay Paul. So they will go to another pay day place, and another one, so you have 8 out at a time."
According to a study done by the Center For Responsible Lending, most pay day loans are taken out because of pay-day debts.
This study shows more than $20 billion in loans taken out are the result of this pay day debt cycle and borrowers are paying more than $3.5 billion in fees alone. "A lot of these pay day loan places get around the laws because they are short term loans. It's not meant to be something that is going to be long term," said Pierce.
When it comes to getting a short term loan from a storefront, California caps the amount you can take out at $300, and requires the loan fee to stay under $45.
The A.P.R. on those loans is 460%.
Loans taken out online are on another level.
Here is just one example for the state of California:
If you don't have great credit, you can take out a loan for $15,000. Then tack on the 33% loan fee you'll be charged, which is almost $5,000. Then try to pay it off over 15-years and your interest rate is more than 33%. On your $15,000 loan, you end up paying back $79,000 and 79% of that is in interest alone. So you can see how easy it would be to fall into this trap. Oh, and if your credit is really bad your interest rate will be around 90%.
"I don't think that anybody had the idea that these were going to be things that people would use again and again and again. That this would just be a one-time fix. They would get by until their paycheck came it, and they would pay it back and go on with their lives. And unfortunately that is not what we see happening. It is just one after another after another after another, and it is several at a time,” said Pierce.
Pew Research shows in order to pay off these loans - 41% of borrowers have to get help from friends and family, pawn off possessions, or go back to that same fix that got them into this mess. "Because they are so easy we don't look at the long term solution that is really going to help, because that is going to bring me pain. Let me do this because this is the easy way, not realizing that is going to cause more pain in the end. Because it is going to make the situation that much worse," said Pierce.
That quick fix borrowers were looking for is causing serious long term problems.