ALLISON KEYES, HOST:
I'm Allison Keyes. This is TELL ME MORE from NPR News. Michel Martin is away. Coming up, we look at how con artists use mail to scam the elderly. I'll talk with a member of the U.S. Postal Inspection Service about some common swindles and how to catch them. That's just ahead.
But first, we look at another way consumers are being tricked into losing thousands of dollars. Payday loan companies promise fast cash before your next paycheck. Maybe you've heard the ads on the radio or you've seen the late night commercials featuring pitchmen like Montel Williams.
(SOUNDBITE OF TV COMMERCIAL)
MONTEL WILLIAMS: Are you facing an unexpected car repair bill, a medical emergency or just need cash until payday? Well, you may not have that money today, but you can in about 24 hours.
KEYES: A quick cash advance might seem like a good idea, but as Washington Post columnist Petula Dvorak writes, it really isn't always. Borrowing money from short-term loan companies can lead to interest rate to the triple digits and mountains of debt. She joins us right here in the studio.
Petula, welcome back to TELL ME MORE.
PETULA DVORAK: Thanks so much for having me.
KEYES: So you recently wrote about a maintenance man here in D.C. named Tyrone Newman and he wanted to give his family a nice Christmas, so he dipped into the mortgage money for things like a Christmas tree and a nice turkey, but he didn't want to tell his wife, so after hearing an ad on the radio, he decided to take out a $500 loan. What happened next?
DVORAK: Well, poor Tyrone. He really did. And he deserved a good Christmas. He had a year of being laid off and, after that, a good solid year of work, so he - you should hear him tell the story. He was so excited. He got everyone presents. His wife - I think even his mother-in-law - he got presents for.
And what happened, he rolled up his debt in mortgage, $1,300. So he got three $500 loans to make that $1,500, thought it was OK. He'd cover it in the next payday. Turns out, they charge a $175 service fee for each of those loans.
KEYES: Wait. One hundred and seventy-five dollars for each of the three loans?
DVORAK: Yes, yes. For each of them. And to make matters worse, when he paid that, he - when he tried to make his first payment on his loan, he just paid down that service fee for each of those loans and it rolled up and rolled up and, soon, he was owing a lot more than he could ever make in a single paycheck.
KEYES: How much more is a lot more?
DVORAK: Well, if we did - we did the math on the back of a napkin - Tyrone and I, when we had lunch. I paid. And, if he had gone on his current path, that $1,500 would have cost him $18,000 in a year. He was paying 651 percent interest on those loans.
KEYES: Six hundred and fifty-one percent?
DVORAK: Not kidding.
KEYES: Interest. How does everything add up so quickly?
DVORAK: It's so fast. Tyrone showed me one of the emails from the company. He couldn't understand why when he tried to pay down his $500 that he owed to one company. They immediately gave him that $175 service fee, which - when you first get that loan - seems like a one-time fee.
But then he got this email. He says, your loan has been renewed twice because we did not hear from you at least two to three business days before your due date.
KEYES: Before your due date?
DVORAK: Before your due date. I don't pay anything on - I mean, before my due date. That's good business. Right? I mean...
KEYES: Right.
DVORAK: Your due date is your due date, but they decided - the way they work, they renewed his loan, basically, refinanced it completely for him and charged him a new $175 fee before he even knew it and they sucked all this right out of his bank account.
KEYES: And this is not just the payday loan companies you find next to your neighborhood liquor store. This is banks, like Wells Fargo, that are doing this now. Right?
DVORAK: That's what's really scary and that's what has some of these consumer watchdog groups up in arms again. What Tyrone used was online and over-the-phone companies. One was a tribal company based in Michigan. Another was in Delaware and they have - their laws are such that they can operate under their sovereign tribal laws and federal laws and they're not subject to the state laws.
Here in D.C., we got rid of payday loans. Those - you know - and you know those places. You see them between a liquor store and the Chinese sub take-out. Those - in 2007, we got rid of them in D.C. and about 30 states have - they've capped those, but banks are getting into it now.
KEYES: Let me just jump in and say, if you're just joining us, you're listening to TELL ME MORE from NPR News. We're talking about payday loans and how borrowing a few hundred dollars can lead to thousands in repayments. Petula Dvorak is a columnist with the Washington Post.
So this practice is legal?
DVORAK: It is legal in...
KEYES: In 30 states?
DVORAK: Thirty states have capped it.
KEYES: Oh, 30 states have stopped it. OK.
DVORAK: They've capped double-digit interest rates. Now, there are places that still charge. There was one that the Center for Public Integrity did an amazing piece on that charged 911 percent interest.
KEYES: But let me ask you - what about the people that don't have credit cards or access to other lines of credit? I mean, this is a legitimate service that they need. Right?
DVORAK: It is. And it certainly can work for some folks. Most of the terms are 10 to 14 days. If you need that cash and you really can make it up in your paycheck right away, then it works, but for most people, it doesn't.
The ones that the banks are getting into now - Wells Fargo, Guarantee, Regions - they're starting at 400 percent interest. Their record isn't very good. Their terms are 10 days. If you pay it back in 10 days, you're cool. You just paid your service fee. But the reality is that it takes an average of 175 days to pay that back.
KEYES: But let me ask - there are those that might say that the interest rates sound high, but if you've agreed to do this, you've read the contract - I mean, shouldn't people be responsible for these kind of payments if that's what they said they'd do?
DVORAK: Sure. There's a whole theory of personal responsibility. We all - but there but for the grace of God, go I. We all slip up and, as you can see, in this letter from this loan company that Tyrone communicated with, slipping up means not calling them two to three days before. I don't know. That's like getting grounded for coming home, you know, at 9:45 when your curfew is 10:00. That's wrong and that's what's got a lot of these consumer groups angry.
KEYES: I do want to say that we invited Tyrone to join us, but he wasn't able to make it work with his busy schedule. But how did his story end up? Is he OK?
DVORAK: He's OK. He's really lucky. His boss paid for it. His boss gave him a loan, saw what was - and he contacted me. His boss is a reader of the column and I've seen him around town and he said, this is insane. I can't believe this is happening. And, fortunately, Tyrone agreed to tell his story to me because he thinks that a lot of folks have asked him about it and a lot of folks can think that this is a quick way to help out your finances.
KEYES: And, briefly, words of wisdom for anybody that might find themselves in their car thinking, I'm going to call that 800 number right now.
DVORAK: Well, the way - I got to quote Tyrone because it was perfect - because he didn't tell his wife about this and he said, "Anything you don't want to tell your little wife about is probably a bad idea."
(SOUNDBITE OF LAUGHTER)
KEYES: That is my favorite quote from the entire article. Petula Dvorak is a columnist with The Washington Post. She wrote about payday loans in her latest column. She joined us right here in the studio. Petula, thanks for being here.
DVORAK: Thanks so much for having me. Transcript provided by NPR, Copyright NPR.