In the past decade, bright green storefronts have been popping up all over Milwaukee, with dollar signs and huge posters in the window advertising, “Up to $2,000 Cash Loans.” Inside, long lines of low-income people wait each day to take out a payday loan — the most expensive legal form of credit. After completing the application and receiving their money — “In Cash!” as some signs proclaim — the clerk closes the deal by offering a free Pay Day candy bar.
Then, 14 days later in most cases, the loan becomes due. The lender usually charges around $20 for each $100 borrowed. (The average annual interest rate for payday loans is 542%, according to a 2001 study by the Wisconsin Department of Financial Institutions.)
“Payday loans are literally the worst loans that you can get,” said Jennifer Giegerich, state director of the Wisconsin Public Interest Research Group. “It’s better to borrow against your credit card. It’s better to go to a pawn shop.” Once the loan is due, many borrowers are unable to pay, and end up “rolling over” the loan — taking out a new loan to pay off the old one.
“These people just end up more in the hole,” Giegerich said. “It just keeps on going.”
Not surprisingly, low-income people make up the majority of borrowers. According to the 2001 report, the average borrower earns under $25,000 a year. The average loan amount is $246, and almost 40% of borrowers roll over their loans more than three times in a row.
Bob Wolfberg, board member of the Wisconsin Deferred Deposit Association, defended payday lending. “We are affordable,” he said. “We are easy and convenient.”
The payday loan industry is fast-growing and lucrative. Last year, payday lenders, including the Payday Loan Store and many others, gave 1.3 million loans in Wisconsin — double the number given in 1998.
“It’s easy money for the lenders,” said Nayoakee Parker, asset development manager for the Social Development Commission. “They target low-income people because those people don’t have disposable income.”
Unlike many other states, Wisconsin does not cap the amount of interest a lender can charge, or the number of times a borrower can roll over a loan. In April, Gov. Doyle vetoed a Republican-sponsored bill to regulate the industry, after Attorney General Pam Lautenschlager called it “one of the weakest regulatory schemes for payday lenders in the United States.”
In the upcoming legislative session, WISPIRG will try to convince legislators to sign a different bill, which would limit interest rates to 36%.
“That’s still a significant profit margin for payday lenders,” Giegerich said, adding that it’s similar to what other states already have. “The longer Wisconsin allows them to go unregulated, the bolder they’re going to become,” she said.
However, the bill faces an uphill climb. The payday lending lobby donated $42,500 for legislators and their party campaign funds in 2002 and 2003, according to the Milwaukee Journal Sentinel.
Wolfberg said payday lenders will, not surprisingly, fight the interest rate limits.
“If you dropped the interest rate to 36%, you’d be cutting our revenues by 95%. What type of business could survive if 95% of our revenues were taken away? It would put us out of business.”
Indeed, many community organizers would like to get payday lenders out of their neighborhoods. Members of the Sherman Park Neighborhood Association regularly attend city zoning meetings to persuade aldermen not to grant licenses for new payday loan stores in their area. According to the association’s executive director, Steve O’Connell, they have had mixed results. Although they were able to prevent one store from entering the Sherman Park neighborhood, it ended up being set up just a few blocks away.
“It’s a racket,” O’Connell said. “You don’t even want to get me started on those things. They’re worse than the devil.”
Richard Moffat, a member of the Sherman Park Neighborhood Association, posed as a potential borrower to get more information. “[The clerk] was not knowledgeable about all the questions,” he said. “It’s a very difficult issue to get your arms around. They deny everything if you go in there and try to find information.”
Moffat said more needs to be done. “We’ve got to get the alderpersons not so willing to offer licenses to these people, especially in areas where we’re already so saturated with them,” he said.
The Council’s Public Safety committee recently held legislation that would have required the businesses to install security cameras and remove signs from windows after industry representatives complained they hadn’t been consulted.
Members of the Metcalfe Park Residents Association are also warning people about payday loans. “If people understood, they could make a conscious decision,” said executive director Larry Moore. “But people just aren’t educated about this.”
Meanwhile, payday lenders continue to expand their business. On a recent morning at a Milwaukee-area Payday Loan Store, after a woman took out a loan for $565, the clerk told her about a special deal. She could make extra money by referring people to the store — $30 for the first two referrals and $40 for the third, the clerk said.
As the woman left, she turned to her daughter and said, “Now I’m going to tell all my friends about this.”