Borrow $325, pay back $793

By MarketWatch

Lenders are squeezing U.S. consumers for as much as $4.2 billion annually in the steep fees charged on payday loans, according to a study by the Center for Responsible Lending and other consumer advocacy groups.

To pay back a $325 loan, the average payday-loan borrower pays a total of $793. The average annual interest rate on such loans runs about 400%, according to the study.

Those steep fees result because even though payday loans are marketed as short-term loans to be paid back within two weeks or so, most borrowers are unable to cough up the cash in that amount of time and instead take out a new loan to repay the money due, according to the report.

"Payday loans sink borrowers into debt that can be as difficult to escape as quicksand," said Michael Calhoun, the president of the Center for Responsible Lending, or CRL.

"The vast majority of borrowers are unable to repay the loan so are forced to renew the loan," Calhoun said. "These repeat borrowers . . . end up paying back far more in interest than they originally borrowed."

About 90% of payday loans go to borrowers who engage in five or more such transactions a year, and 62% of the loans go to borrowers with 12 or more transactions a year, according to the report, which was based on 2005 data from state regulators, lenders' public filings and industry analysts.

To get at the average total cost figure of $793 to repay a $325 loan, the center took the average $52 fee paid on such loans and multiplied it by nine to account for the average number of times such a loan is flipped into a new one. That's a total of $468 in fees to pay back the original $325 loan.

"You add this up on a national basis, and predatory payday lending costs borrowers $4.2 billion. That's a conservative number that includes only those fees to borrowers taking out five or more loans per year," Calhoun said.

Industry points to 'valued and trusted option'

At least one payday-loan company took issue with the report.

"Contrary to CRL's spin, responsible uses of the payday product provides consumers firm footing to overcome unexpected financial circumstances," said Ken Compton, the chief executive of Advance America, in a news release.

Advance America is a payday lender with about 2,750 centers in 36 states.

"The fact of the matter is, consumers who choose our product understand the direct out-of-pocket costs," said Jamie Fulmer, the director of investor relations for Advance America.

Fulmer said a chart detailing the company's fees is posted in each of its lending outlets, and the fees are stated in all customer agreements and on the company's Web site.

"We don't (claim) our product is right for everybody, but we believe it's a valuable and trusted option that consumers deserve to have access to if they choose," Fulmer said.

He said Advance America typically charges about $15 per $100 loan.

"We believe our product . . . compares very favorably on an out-of-pocket basis with the other products that are available (when you consider) the credit card late fee, the bounced-check fee, utility late-payment fees, all of which carry punitive credit consequences," Fulmer said.

But Advance America's fee varies by state, according to the company Web site. For instance, borrowers pay $21.75 for a $100 loan in Mississippi, $20 for $100 borrowed in Colorado and $17.50 for a $100 loan in California. See the Web site.

Consumer advocates suggest credit cards

Consumer advocates said borrowers would be better off taking loans through credit cards or from a bank or credit union, if those options are available, rather than a payday loan.

"There are presently a wide array of financial alternatives that are far less costly to payday loans, even if you take a simple credit card loan or cash advance. The most expensive credit cards usually have rates that are far less (than payday loans). Equally important, they give the borrower a chance to pay the loan back over time rather than this lump-sum payment in two weeks," Calhoun said.

Others agreed.

"A study that the industry backed . . . indicates that only 6% of payday-loan customers say they have no other alternative for getting credit," said Jean Ann Fox, the director of consumer protection for the Consumer Federation of America.

"The payday loan may be the easiest thing to do. You write a check, and you walk out the door with cash. There are other alternatives, and mainstream financial institutions can provide them," Fox said.

Payday loans "have to be repaid all at one time," she said. "These are balloon-payment loans. Families who are already having trouble making ends meet are unlikely to be able to repay the loan in full."

Payday lending is legal in 39 states, but Connecticut, Georgia, Maine, Maryland, Massachusetts, New Jersey, New York, North Carolina, Pennsylvania, Vermont and West Virginia ban such loans, according to the report.

In a conference call, the consumer advocates said the 36% interest-rate cap that Congress recently mandated for loans to military personnel is a good model for loans to all consumers.

Said Fox: "We think this provides a great example for states to follow to protect all of their cash-strapped families."

This article was reported and written by Andrea Coombes for MarketWatch.