Payday loans interest rates can lead to more debt

By Aaron Gilchrist - bio | email

RICHMOND, VA (WWBT) - A warning for people who've fallen on hard times and are considering going to a payday lender. Consumer advocates say taking that option could land you in an even deeper hole.

You'll remember a few years ago virginia lawmakers went after the payday loan industry trying to tightening regulations.

Well, the industry fought back with a $3 million war chest. Then according to one Henrico woman found others ways to help themselves to your money.

Theresa Toman took a break from packing up her henrico Home before a move to tell us about the roller coaster ride that has been her life for past few months.

It began as it does for so many these days. She fell on hard times and needed a small loan to make ends meet.

"They gave me two options," said Theresa Toman.  "I could either take a $500 cash advance or a $750 line of credit."

Theresa went to payday lender advance America not far from her home.   She says they explained there wasn't much difference between the cash advance and the line of credit.

"Basically, they handed me the papers," said Toman.   "They said you need to read these and sign them."

Here's a copy of the revolving credit agreement she signed.   Theresa made her first payment and then lost her job.   And that's when reality kicked in.

"We went back in beginning of May to pay it and off a $750 loan, my payoff amount was almost $1400," said Toman.

The contract Theresa signed had her paying off not a payday loan, but a line of credit with an annual percentage rate of up to 456 percent.

"It occurred to me there was interest.  I assumed it was something similar to what your credit cards are," Toman said.

Her payoff amount included $618 in interest.

"What they're doing now is essentially a 300% credit card," said Jay Speer with the Virginia Poverty Law Center.  "It's an open end loan.  It doesn't have any set period to be repaid.  You have to pay a minimum payment just like your credit card except you're paying more than 10 times the average credit card."

Consumer law expert Jay Speer runs the Virginia Poverty Law Center and worked to toughen Virginia laws on payday loans.

While those lenders are under tighter rules now, speer says they've found away around them.

"The payday lenders went out and they decided they didn't like restrictions that were imposed on them even though they could still charge 200-300%... And they started doing these lines of credit which fall under a different statue," Speer said.

That statue doesn't call for any caps on interest and Speer says the lenders agressively pursue borrowers.

His best advice on payday loans, car title loans, and lines of credit comes from two clients who are now homeless.

"They could not pay their rent anymore because of the car title loan.  And they decided they would keep the car title loan because if they lost their car they'd lose their job," Speer said.

"This option is gonna make it a whole lot worse.  Whatever your situation is, this is gonna make things much, much worse," Speer said.

This year the General Sssembly toughened the law on payday lenders extending lines of credit.

Speer says many have gotten around that by dropping their payday lending licenses... And doing lines of credit and title loans only.

You can learn about avoiding debt traps from the Virginia Partnership to Encourage Responsible Lending at

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