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We're going to have a look now, at what's known as payday loans. Depending on who you talk to they are either lifelines to people with a financial emergency or they're predatory transactions that carry impossibly high interest rates.

Congress will be debating which description best fits as lawmakers finalize the language in the financial overhaul bill. Planet Money's Alex Blumberg talked to two ordinary people who work inside the payday lending industry to find out what they think.

ALEX BLUMBERG: In the town of Logan, Utah, in a strip mall next to an audiology clinic and a TV shop, there's a little storefront. In a past life it was a bank branch; today, it's where Michael Berry works. He's a payday lender. Meaning every day, people come in and borrow money from him at a pretty high interest rate.

Mr. MICHAEL BERRY (Payday lender): Our loan is $1.50 per hundred per day, so after 5 days, $7.50 - what is that. It would be $107.50 is what they owe back.

BLUMBERG: So that's a $7.50 interest rate over five days. What is that annually?

Mr. BERRY: I think the interest rate is somewhere like 547 percent annually.

BLUMBERG: 547.50 percent, to be exact. And this, of course, is where the predatory label comes in. At the end of the year, you would owe more than five times what you originally borrowed. But the thing is, this fact is not hidden at all from Berry's customers. In fact, it's printed in big block letters on a chart facing them right next to where Berry sits: 547 percent Annual Rate. It's also on the website.

And yet, a lot of times people will let their debt just roll over. Borrow $100, then a month later pay the interest off about $45 - but not pay off the original balance. And they'll do this for several months in a row. After three months, they've paid $135 to borrow their original $100, which Berry finds strange.

Mr. BERRY: It's almost - I would never do it. I am assuming it's because their credit cards are maxed out. They can't get anymore money any other way, so they just come to us every single month to help balance their checkbook when it would be easier not to.

BLUMBERG: I mean, are you a predatory lender?

Mr. BERRY: I would say - yes. But at the same time I do get a lot of people saying, oh, Im so glad that you guys were able to help me out with that.

I guess if you define predatory lending as high interest rates to people who probably shouldnt be getting them, then yes. But predatory lending in the sense, is there hidden fees, am I trying to like cloak and dagger anybody? No.

BLUMBERG: Payday lending has grown rapidly in the last decade or so. In fact, between 2000 and 2004 alone, the number has more than doubled to just over 20,000 stores nationwide - more payday stores than there are Starbucks outlets, just by way of comparison.

Ms. CHRIS BROWNING (Manager, Check 'n Go): 2001 seemed to be the breaking point. Everybody wanted a piece of the pie.

BLUMBERG: Chris Browning is another payday lender. She works at the Check 'n Go in Mansfield, Ohio. I met Browning through Gary Rivlin, the author of a new book about payday lending and other similar businesses. Browning told me and Rivlin - you'll hear his voice on the tape - that she worked at one of the first payday lending branches in Mansfield and she watched as the others came in - Advance America, Fast Cash, Cashland - many right across the street.

Ms. BROWNING: If I was a good golfer, I could put a golf ball through the window of three other companies.

BLUMBERG: Really?

Ms. BROWNING: Yes.

Mr. GARY RIVLIN (Author, "Broke USA"): I saw it. I saw it. I walked it.

BLUMBERG: They were that close.

Mr. RIVLIN: You could walk it in five minutes.

Ms. BROWNING: That's when my customers that I had had, they would hit me on Monday, hit Advance America on Tuesday, Cashland on Wednesday and Fast Cash on Thursday.

BLUMBERG: Now, you'd think the more stores in Mansfield, the more they'd need to compete with each other for customers by offering lower prices. But that didnt happen. None of the payday lenders tried to take market share by saying, hey, we'll lend you that money but at a lower rate than the store on the corner.

According to Bob DeYoung, a finance professor at the University of Kansas, the answer to this mystery may have to do with regulations which cap the interest rates on payday loans.

Professor BOB DEYOUNG (University of Kansas): Almost every state puts a price ceiling on how much a payday lender can charge. Now, that sounds like a way to keep prices low or at least from getting too high. But one thing about price ceilings is they often have acted over time as magnets for prices.

BLUMBERG: DeYoung and his research partner, Ron Phillips, did a big study of payday lenders in Colorado. They looked at about six years of data, which started at the same time Colorado passed a law capping the maximum interest that payday lenders could charge. They found the law had the opposite effect than the one intended.

Prof. DEYOUNG: Payday loan prices went up, and after about three or four years, over 95 percent of the payday loans in Colorado were priced at the price ceiling. Everything else equal, the suppliers of goods would rather collude with each other to set a high price. Once this regulation's in place, they have a focal point where they can set their price at that focal point and not have to worry about being sued for colluding with their competitors.

BLUMBERG: DeYoung does favor regulation of the industry. For example, limiting the number of times people can use a payday lender, so they don't get trapped in a cycle of ever-increasing interest payments.

And in fact an amendment by Senator Kay Hagan, a Democrat from North Carolina, would have made it illegal to offer customers more than six payday loans a year. That amendment was blocked and the Senate bill was passed without considering it.

No one knows what if any new rules will be in place for payday lenders once the House and Senate pass the final version of the bill.

For NPR News, Im Alex Blumberg.

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