STACEY VANEK SMITH, HOST:
Payday loans - these are small, short-term loans sometimes called cash advances. They're famous for having really high interest rates, like 300 to 400 percent in some cases.
CARDIFF GARCIA, HOST:
Payday lenders are usually a kind of lender of last resort. So people who can't get a loan from a bank or who can't get a credit card will often try to get a payday loan because they're very fast and easy and extremely popular. Payday lending has become a really big business.
VANEK SMITH: A big business that was about to get a lot smaller. The Consumer Financial Protection Bureau, or the CFPB, announced federal regulations a couple of years ago that would've really restricted who payday lenders could lend to. And those restrictions were set to go into effect later this year.
GARCIA: But that was before leadership at the CFPB changed. President Trump appointed a new head of the bureau. And earlier this month, the bureau announced that changes to payday regulations have been delayed. This is THE INDICATOR from Planet Money. I'm Cardiff Garcia.
VANEK SMITH: And I'm Stacey Vanek Smith. Today on the show, the business of payday loans. We look at the industry, what the regulations would have done and also what it's like to get into a debt cycle with payday lenders.
AMY MARINEAU: It's kind of like an addiction. It's weird, but it's true.
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GARCIA: Amy Marineau took out her first payday loan nearly 20 years ago. Amy is a hospital patient care technician, so her job is in high demand. Getting work was not a problem. But covering all her expenses - that was a problem. Amy was living in Detroit with her husband and three little kids. She says the bills had started to feel crushing.
MARINEAU: We were barely making it, and I came across something about a payday loan. And I called my husband, and I said, you know, we have so many bills right now, and, you know, taking out this $600 would really help us right now.
VANEK SMITH: Amy went into the payday lending store to just see if she could get a loan - just a little one - just $600 to get them through this tough month.
MARINEAU: You walk in, and it just looks like a bank. There's chairs all around, and there's a place for your kids to color with coloring books and play. It's just a friendly feeling type of deal.
GARCIA: Amy went up to the round counter and asked the receptionist how to get a loan. She says she told them what her paycheck was, and they said, sure, you can have $600.
VANEK SMITH: How did you feel when you took out the first loan?
MARINEAU: I felt like, yes, I can pay this bill.
VANEK SMITH: Amy says it felt like she could breathe again, at least for a couple of weeks. That is when she needed to pay the payday lender back with interest, of course.
MARINEAU: You have to pay 676.45. That's a lot of money.
VANEK SMITH: You still remember the amount.
MARINEAU: That 676.45 - it just now popped in my head. That's how much we paid.
GARCIA: That extra 76.45 was just the interest on the loan for two weeks. Play that out over a year, and that's an annual interest rate of more than 300 percent. In other words, if Amy had kept the loan for the full year and paid the same interest rate, she would've owed more than $1,800 in interest.
VANEK SMITH: But for the moment, it was just 676.45. And Amy had every intention of paying it back. But when she went back into the payday loan store a couple weeks later, it felt like she couldn't pay it back quite yet, so she took out another payday loan to pay off the 676.45.
MARINEAU: Because something else went wrong. You know, one of our cars died, or we needed something fixed at the house. It was always something - something coming up, which is life.
GARCIA: Week after week, Amy was doing this - taking out loan after loan.
MARINEAU: It goes on and on.
VANEK SMITH: What is the feeling when you would go in? Did it feel like a relief when you would get the money every week? Did it feel like...
MARINEAU: No. I was so mad at myself all the time...
VANEK SMITH: Oh.
MARINEAU: ...Because I was doing this constantly to myself. And it went on for years. You got people calling you on the phone. You know, you got to pay this payday loan. You get into this really bad place financially.
VANEK SMITH: Amy and her husband started using payday loans to pay off credit cards and credit cards to pay off payday loans. And the amount they owed kept climbing and climbing.
MARINEAU: It's crushing, too. It's crushing. It's hard. It's - you feel defeated. Like, when is this ever going to end? Am I ever going to be financially stable? Am I ever going to get there? How am I going to take care of my family?
VANEK SMITH: This cycle Amy found herself in - it's the cycle that most of the people who take out a payday loan find themselves in. A study from the Center for Responsible Lending found that half of payday loan borrowers default on a payday loan within two years of taking out their first loan.
GARCIA: And this is, of course, why the CFPB, the Consumer Financial Protection Bureau, had planned to put payday loan regulations in place later this year. Those new rules were announced under the Obama administration and would've restricted who payday lenders could lend to. Namely, they would only be able to lend to people who could prove a high likelihood that they could immediately pay the loan back.
VANEK SMITH: How much of a difference would those regulations have made in the industry?
RONALD MANN: I think it would've made a lot of difference.
VANEK SMITH: Ronald Mann is an economist and a professor at Columbia Law School. He's spent more than a decade studying payday loans. And Ronald says the regulations would've basically ended the payday loan industry because it would've eliminated around 75 to 80 percent of payday loans' customer base.
GARCIA: He says payday lenders are in the business of making loans to people who can't really afford the loans that they take out. If you take away that group - that customer base, then the whole industry would pretty much start to vanish.
MANN: I mean, these are products that are - there's a fair chance people aren't going to be able to pay them back.
VANEK SMITH: Ronald says that is exactly why about 20 states have either banned payday loans entirely or really restricted them. But he says the problem with a federal ban on payday loans is that it's not really financial regulation so much as a kind of ethical regulation. And he says, in a free market, there's an argument that the government should be really careful in that area.
MANN: But that's sort of controversial - that we should keep people from borrowing money that they believe that they need because we think that they're wrong 'cause they need it.
GARCIA: Of course, one option would be to just cap interest rates. After all, payday lenders make a lot of money. They lend about $46 billion a year and take in about $7 billion in fees. But Ronald says that regulating interest rates would probably have a similar effect as just banning them. It would put them out of business.
VANEK SMITH: And Ronald says payday lenders are serving a huge community of people who can't really get money in other ways. Often, they're borrowers with bad credit who can't get a loan from a bank or a credit card - things like that. And lending to people in this way - he says it's a risky business. And payday lenders have to charge a premium for taking on that risk.
GARCIA: Now, a lot of states do limit the interest rates that lenders can charge. Ronald says that in those states, there are not a lot of payday lenders. On the other hand, more than 30 states don't really have restrictions at all on payday lending. And in those states, payday lending has gotten huge, or, you might say, supersized.
MANN: The number of payday loan stores is about the same as the number of McDonald's.
VANEK SMITH: That's a lot.
VANEK SMITH: Actually, there are more payday loan stores than McDonald's or Starbucks. There are nearly 18,000 payday loan stores in this country right now. And that is today's indicator - nearly 18,000 payday lending stores in the U.S.
GARCIA: Ronald says the problem with shutting down this behemoth is that demand won't go away. The industry would probably just move online, where it would be really hard to regulate. He says a real question he thinks we should be asking is why there is so much demand for these loans in the first place.
MANN: So I think what you really have to see is to step back and say or ask, why are there so many people in our economy that are struggling so hard that they desperately need this amount of money to, you know, pay medical bills or make a car payment?
VANEK SMITH: People like Amy Marineau. She and her husband got deeper and deeper in debt. They had to declare bankruptcy, and they lost their house.
MARINEAU: The turning point for me was having to, at 43, live with my mother again. And not being able to take care of our family the way that we wanted to and not having a home of our own was the worst feeling in the world. It's devastating.
GARCIA: Amy says that at that moment, she decided no more payday loans ever. She went through bankruptcy. And since then, she says, she has been incredibly disciplined about her budget. She and her family have their own place again, and she's currently working two jobs. She says they all live on a really strict budget - just the necessities.
VANEK SMITH: Of course, Amy says, she hasn't escaped payday loans entirely.
MARINEAU: I see this one - these commercials all the time. It's like, you know, three people standing in robes, and then pops up above their head how much they're going to get. And it's like, yay, at the end, and I'm like, no.
MARINEAU: It's not worth it. It gets you into a bad place. Find a different solution - a better solution.
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