Squeezed by hard times, more resorting to pawnshops, payday loans [The Miami Herald]

Sept. 19--As a nurse, Melvern Thompson was used to earning paychecks flush with overtime. Taking home $2,000 to $4,000 a month in addition to her regular wages made for a comfortable lifestyle.

But as Jackson Health System works through a budget crisis, Thompson's overtime, plus another 5 percent of her pay, were cut. Suddenly, she found it impossible to make ends meet -- although she was working more to make up for a legion of laid-off co-workers.

So Thompson, along with a growing number of Americans in the middle of what is feeling like an endless economic downturn, turned to payday loans to cover her monthly bills -- and found herself locked into a pattern she can't seem to break.

Getting a loan "made me $500 short for the next check. It became a revolving cycle: You were always $500 short when you went into that payday advance. You have to pay them back -- and you need that $500."

The plight of Thompson and others suffering in this economy means the payday loan business is booming. Payday loan centers and pawnshops have become more popular than ever as sources of fast, short-term credit. The payday loan industry was one of the country's most profitable last year, according to financial information firm Sageworks.

DEFAULTS: UP

This month, a Chicago-based community group revealed a report that showed that major banks are financing the industry, to the tune of $1.5 billion to publicly traded payday lenders alone.

At the same time, the average pawn shop loan has increased from about $80 to $100 in the past year and more people are defaulting on those loans, according to the National Pawnbrokers Association.

As the name implies, payday loans are only available to people who are working, and users must have active bank accounts. Even as unemployment grows, the loans are more in demand from working people whose income may have dropped because one member of the household lost a job, a worker's hours or pay were cut and bills keep piling up.

Borrowers say they find the fees and interest more competitive than the alternative: late charges, overdraft fees, finance charges and interest charged by utility companies, banks and mortgage companies, said Jamie Fulmer, spokesman for Advance America, the country's largest public payday loan company.

Annualized, payday loan interest rates may be as much as 300 percent or higher, drawing the ire of consumer advocates and earning the industry labels including "legalized loan-sharking," "financial apartheid" and "predatory lending."

But the cost is up front and transparent, Fulmer said.

Customers "see our product as a cost-competitive alternative. You often hear critics talk about exorbitant annual percentage rates, but you have to look at an apples-to-apples comparison," Fulmer said. Credit card late fees interest rates and overdraft fees can be far more expensive on an annualized basis, he said.

THE BUS DRIVER

The price of a payday loan is exactly why Joseph Nerva, a Broward school bus driver, has turned to them occasionally.

"They charge -- you know they charge," Nerva said of the fees and interest tacked onto the loan amount. He had stopped to use one of the many Check Cashing Stores on Davie Boulevard in Fort Lauderdale this week to pay an FPL bill. But "it would be more expensive to pay late fees on other bills."

Here's how the loans work, Fulmer said: A borrower writes a personal check to the payday loan center for the amount of the loan and any fees and interest. In return, the borrower gets the loan amount in cash and usually has about two weeks to return to the center to repay the loan.

If the borrower doesn't repay the loan, even after a grace period, loan centers have the option of cashing the personal check. At Fulmer's company, 97 percent of borrowers repay loans. Of the remaining borrowers, many checks bounce -- which allows the company to begin the collections process.

A study by Social Compact, a Washington, D.C., nonprofit, found that in many of Miami's 14 inner-city communities, nontraditional financial institutions, including payday loan centers and pawnshops, were far more common and more easily accessible than banks and credit unions.

"Part of the reason: A bank could not sustain a presence in this area," said Carolina Valencia, the group's director of research. "And many residents could not qualify for the banks services" even if they were readily available.

POVERTY TAX

However, because of the fees and interest payday lenders and related companies charge, using them means paying a sort of poverty tax, Valencia said.

Still, the organization doesn't think payday lenders should be banished. For some people, they are a true necessity or simply more desirable than traditional banks. Some immigrants may not trust banks because of financial instability in their home countries, she said.

And nontraditional places are very clear what they charge, she said. "It might be more than what a bank charges, but there are no hidden fees. For a person that lives on a limited budget it's sometimes a less-risky choice," Valencia said. "The idea is not to get rid of these services. The idea is to regulate them better and find a way to create a continuum of financial products to serve all community needs."

Florida has some of the most stringent laws in the country governing payday loans, said Ian A. MacKechnie, executive vice president of Tampa-based Amscot Financial. The company is the largest Florida-based cash advance company.

Florida law caps the amount of a payday loan to $500 and limits the charge to 10 percent of the loan amount -- plus a verification fee of up to $5. The verification fee is partly to cover the cost of recording the transaction in a state database. (The state actually charges $1 to report the transaction, which is what Amscot passes on to customers.)

The database is used to ensure no one gets more than one payday loan from any lender at a time and keeps people from getting a new loan less than a day after paying off an old one. Elsewhere, the lack of such a cooling-off period means some people end up in serious debt, fast, he said. "They go from one shop to another and people would end up thousands of dollars in debt."

PAWNSHOPS GET PICKY

Florida law also says the maximum period of a loan is 31 days -- and if customers don't repay the loan, the lender has to give them at least another two months to repay it, without charging additional fees, if they go to credit counseling and set up a repayment plan and stick to it.

In Thompson's case, pawning jewelry became a necessity in addition to payday loans. Thompson helps support her son, who is in college, and her daughter, who lives in New York.

"You went to the pawnshop with whatever jewelry you had just to make ends meet," she said.

At Classic Pawn & Jewelry in Fort Lauderdale, Brittany Thomas unfastened a ribbed gold anklet and placed it on the counter, along with a handful of other jewelry, a digital camera and iPod. She was hoping to pawn the items for cash.

But she walked out with all of her stuff.

"They're picky," said Thomas, 20, who was accompanied by her son Jacarry, 3. Then she closed the clasp on her anklet -- which was gold plated, making it worthless for scrapping -- and walked out.

The selectivity is on purpose, said manager Tom Staiger. The store is overflowing with people looking to pawn items, but short on customers looking to buy any of his growing collection of computers, bicycles, watches, fishing poles and flat-screen TVs.

"No one's buying anything," he said, but people coming to the store are looking to trade their stuff for cash to pay electric bills, buy clothes for school and fill prescriptions.

And many longtime customers who used to loyally repay their loans and retrieve their items are defaulting, he said.

CASH FOR GOLD

Many pawn stores are staying afloat because people are coming in to sell their gold jewelry, which stores can scrap for cash. Gold prices are approaching $1,300 an ounce.

Because of Pawn Stars on The History Channel -- a program about a three-generation family of Las Vegas pawnbrokers that is one of the most-watched shows on cable -- and because of the weak economy, "pawning has become more mainstream," said Emmett Murphy, spokesman for the National Association of Pawnbrokers.

"The loans are $100. They're not borrowing money to go on a cruise. We call them safety net loans -- to get them through the end of the week, put gas in the car."

In Florida, state data shows that monthly transactions at payday lenders have increased from fewer than 200,000 in 2002 to 600,000 and higher at the end of 2009. Over the same time period, the number of payday loan stores increased from fewer than 1,000 to more than 1,400, and the size of borrowers' loans grew from an average of less than $340 to more than $390.

In all last year, Floridians got 6.4 million payday loans, borrowing $2.5 billion and paying $244 million in fees.

It's no wonder then, that Eduardo Gomez, CEO of Miami-based Zoom PayDay, said his company hopes to have a presence in dozens of existing businesses over the next few months. They were an online-only company until Friday, when Zoom began offering its products in an existing brick-and-mortar store in Miami selling money orders, check-cashing services and related items.

"There is a very real need for folks that may not be prime borrowers to get short-term access to money," Gomez said, as well as people who wouldn't have considered a payday advance in the past.

"It's everybody from grandparents raising their grand kids on a fixed income, people that are making more than $70,000 a year in white collar jobs who wear a tie to work, hourly workers, retailers, professionals that are accountants, marketing folks. People are living paycheck to paycheck. Unexpected expenses come in and they need to find a way to get out of all this debt and stay afloat."

HARD TIMES IN HIALEAH

That's what happened to Kim White of Hialeah. White, who works for a group health insurance provider, lost her mother this year and had to cover funeral expenses. She didn't get a raise. And her car broke down twice in a week. She'd used her company-granted personal time when her mother died and White lost a day of pay each time the car gave out. Writing checks or using her debit card to pay for each emergency became too expensive.

"I kept overdrafting. It was costing me like $35 per item," White said. "When I go to [Advance America] I only have to pay back one charge, versus $35 a pop."

She said she hopes to break the payday loan habit when she gets her tax refund next year.

That's what Lars Gilberts, director of the United Way Center for Financial Stability, hopes for Thompson, the Jackson nurse. The center is helping Thompson with her finances.

In the meantime, Thompson will be working to cut her household spending -- drastically -- and keep her spending in check during the holidays.

"It's going to be a hard slog to the end of the year," Gilberts said. "There's definitely a light at the end of the tunnel."

Miami Herald business writer Ina Paiva Cordle contributed to this report.

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