Friendly sales pitch can’t hide payday loans’ unfriendly rates

by David Lazarus, Los Angeles Times

stock_payday_loans-smThe letter that recently arrived at homes throughout California and other states features a picture of Sylvester Stallone in “Rocky II” training for another shot at greatness.

“As you’re making your financial comeback,” it says, “we want you to know Rise is here to help.”

Specifically, the company is offering a pre-approved loan of $2,600, “which can be deposited into your account as soon as tomorrow.”

“Everyone wants to get ahead financially,” the letter says. “That’s what we’re all about. Rise is about getting you the money you need so you can make progress tomorrow.”

But don’t cue the gonna-fly-now music too quickly.

The fine print of the letter reveals that the annual percentage rate on that $2,600 loan is 174.54%, and that you’ll be required to make 36 biweekly payments of $193.16 each.

In other words, that $2,600 can cost you almost $7,000 in principal and interest.

Welcome to the new-and-not-so-improved world of payday lending, which has adopted more sophisticated sales pitches and branding to lure unwary consumers into loans that can trap them in endless cycles of debt.

Lenders are trying to shed the stigma of typical payday loans, which often are sold in stores in low-income neighborhoods and target people who may lack the financial savvy to understand the hefty interest and fees involved.

Instead, they’re operating online, which has the added advantage of evading strict state laws.

California, for example, limits payday loans to $300 and permits the lender to charge an annual percentage rate of up to 460% for a two-week loan.

“We’re seeing more and more lenders turning to the Internet,” said Joe Ridout, consumer services manager for the advocacy group Consumer Action. “They claim they’re trying to help people, but all they’re doing is making people’s problems worse.”

Rise is offered by a Texas company called Think Finance, which until 2010 was known as ThinkCash and offered loans under the name PayDay One.

Ken Rees, chief executive of Think Finance, told me that his company is focusing on “next-generation financial products” that are friendlier to consumers.

“We started out as a payday lender,” he said. “But as we evolved, we realized that we could come up with products that are different, that can help people get out of debt.”

To its credit, Think Finance does make a modest effort to inform borrowers of the potential pitfalls of short-term loans.

For example, at the very bottom of the fine print on the back of its recent letter for Rise, the company says that “this is an expensive form of credit” and “this service is not intended to provide a solution for longer-term credit or other financial needs.”

“Customers with credit difficulties should seek credit counseling,” it says.

That message, however, is considerably less prominent than the cheerful, here-to-help sentiment on the front of the letter.

The “Rocky II” tie-in is part of a marketing campaign launched in October. It features that lovable lug running through the streets of Philadelphia as he prepares for his big return to the ring.

“We’re trying to communicate the idea of a financial comeback,” Rees said. “Rocky had challenges, but he came back.”

One of the ways Rise loans can help, he said, is by gradually lowering the interest rate as the loan is repaid. That 174% annual percentage rate can drop to as low as 36% over time.

“I’m not saying we’re offering access to credit at rock-bottom rates,” Rees said. “We’re just trying to offer a better option.”

And that’s laudable. But let’s be honest: For someone living paycheck to paycheck, a 36% interest rate isn’t exactly a sweetheart deal. It’s better than 174%, but it’s still enough to drain you of any extra cash.

For a truly better payday-loan option, the U.S. Postal Service might have the answer.

The agency’s Office of the Inspector General estimated in a recent report that about 68 million Americans have no checking or savings account and must turn to payday lenders when they face a cash crunch.

Such households spent a total of roughly $89 billion in 2012 on interest and fees for short-term loans, it said. That’s an average of $2,412 a household, or about 10% of the average poverty-line family’s annual income.

The inspector general’s office made an intriguing proposal: Have post offices partner with banks to offer basic financial services, such as check cashing and short-term loans, for a fraction of the cost that payday lenders charge.

The average U.S. payday loan of $375 costs consumers an average of $520 in interest alone over the life of the loan, the report said. A Postal Service loan for the same amount could cost just $48 in interest.

“If even one-tenth of the 12 million Americans who take out a payday loan each year got this hypothetical postal loan instead, they could collectively save more than half a billion dollars a year in fees and interest,” the report estimated.

This is a very good idea, and it should be explored by regulators and lawmakers. Many other countries have similar systems.

Moreover, the Postal Service already provides money orders and international money transfers. It’s not much of a stretch to expand such financial offerings to include other services.

As for companies like Think Finance and its Rise loans, your best bet may be to keep your distance.

Consumer Action’s Ridout said people facing money troubles would do better to explore a paycheck advance from their employer or even a cash advance on a credit card. Some credit unions also offer short-term loans.

“You’d still have to pay interest on these loans, but nowhere close to what you’d pay for a payday loan,” Ridout said. “A payday loan is the absolute worst alternative, short of going to the mob.”

And don’t forget: Rocky ends up broke and brain damaged by the end of the fifth “Rocky” movie. That’s not the kind of help anyone needs.

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