If you have a cash flow problem prior to payday, there are plenty of deferred deposit businesses around now who will lend some money to tide you over. You write a personal check that the business holds until payday, and you get cash worth 18% less than your check.
The problem is that because the check is only held an average of two weeks, consumers end up paying an equivalent annual compounded interest rate of more than 600%.
“If you gave them a check for $400, the most you would get back is $328,” said John Allison, commissioner, Mississippi Department of Banking and Consumer Finance. “Most transactions are for 14 days which works out to an APR of 572%.”
Allison said charging those kinds of rates for a deferred deposit transaction in Mississippi is legal. And since the deferred deposit businesses don’t do credit checks or require any collateral, and are dealing with people in a financial bind, the transactions could be considered high risk.
“In any financial situation regardless of which side of the ledger you are on, the asset or liability side, the greater the risk, the greater the rate,” Allison said.
Title pledge lenders and pawn shops are limited to 25% per month, which annualizes to 300% per year.
The Department of Banking and Consumer Finance regulates deferred deposit lenders, pawn shops and title pledge lenders, as well as banks. After an examination for compliance, the department did find that some check cashiers and title pledge lenders were overcharging on certain items, and in 2000 well over $200,000 was refunded to customers.
But Allison said the department doesn’t receive an excessive number of complaints about check cashiers, pawn shops and title pledge lenders. All terms of the agreement are disclosed in the shop and on documents that are signed, so consumers should know what they are getting into.
“It comes back to the fact that people don’t have to jump through a lot of hoops to get money at these places: they have to have a job and checking account, or title to a car,” Allison said. “They can complete a transaction in probably 15 minutes. Also, check cashing stores will cash third party checks. A lot of people want to deal in cash and that’s an easy way to cash checks.”
Ricky Myers, president of the Mississippi Check Cashiers Association and owner of Available Cash, Hattiesburg, is not surprised there are few complaints filed about his industry.
“The customers love it. It is a safety net,” Myers said. “They know they can come over and get the money if they need to much like people use a Master Card or VISA as a safety net. Customers are happy that the industry is here.”
While some people feel the fees charged are too high, Myers said they are still less than what a customer would be charged for writing a couple of hot checks to cover something like emergency medical expenses. Non-sufficient fund (NSF) charges for two or three checks can add up quickly.
“Most people budget their paycheck to bills,” Myers said. “If something comes up out of the ordinary, if the kids are sick or the car breaks down, then the money is simply not there. The option of coming to us for small fee compared to returned check fees just makes good sense.
“A lot of people feel like sometimes we take advantage of the poor. But that is a wrong conception. These people that deal with us have to be employed, and we look at money they take home to determine the amount of money they can cash a check for. We try to make sure they don’t get in a financial bind they can’t repay. Naturally we want them to be able to repay. If they don’t, we have created a problem for ourselves.”
He said that since most people in today’s society spend what they make, any emergency will put them in a bind. He adds that it isn’t just lower income people who find themselves in that position. Customers’ average annual income averages from $15,000 to $60,000.
Harold Palmer, president and CEO of the Better Business Bureau of Mississippi, points out that the growth of the deferred deposit industry has come during the same time gaming was legalized in Mississippi. The industry that started in 1993 now has about 730 businesses in the state.
“I’m not anti gaming or pro gaming,” Palmer said. “But we find gaming has created quite a bit of activity for this type of lending. People need to realize they are paying a ton of interest even though the companies are operating within the legal confines of the law. We’ve seen instances where people are continuously cashing a check. They write a check in two weeks to pay off a check they wrote two weeks before. It gets to where they get very little money. It’s all interest.”
There are title pledge operations even inside casinos where patrons can pledge a car title to obtain cash. But Bruce Van Nostrand, president of the Mississippi Title Pledge Association, said he doesn’t see gambling being a big influence on his industry.
“People don’t come in and say, ‘I’m borrowing $100 to $200 to go gamble,’” Van Nostrand said.
As far a criticism about high rates, Nostrand said that is justified by the difficulty in collecting on bad debts. Their only recourse is to find the customer’s car, and then sell it.
“You have to understand we are not lending on 1999 and 1998 models,” he said. “Instead most people are lending on cars from the 1980 to 1992 era. We’re not lending on new cars so we make a tremendous profit when we sell them. The industry is serving a market. If we weren’t here, that same customer would borrow from what I call ‘pocket lenders,’ people in the community who loan out of their pocket. I can assure you their rates are far higher.”
Another misconception is the amount of the loan. Van Nostrand said the average loan is only about $300, and the average payback period is four or five months.
“I would be happy to see people come and ask customers what they think of our business,” he said. “People would be shocked at the reaction the customers would have. We don’t do credit checks. Basically if they come through the door and have a title, and the car has enough value for what they are asking, we give them a title pledge. I am not allowed to sue the customer for deficiency balance. I can’t garnish wages. I have absolutely no resource other than to try and find the vehicle, and if I do, get what I can get for it against what is owed me.”
The fact that so many people need short-term loans for relatively small amounts of money may reflect a lack of financial savvy andor failure to be disciplined enough to save for a rainy day fund. Financial analysts recommend that people keep three to six months living expenses in savings in case of emergencies.
Allison said the prevalence of this kind of borrowing indicates a need for better education about finances. He said while there are some elective finance courses in high school, he is a proponent of that kind of instruction starting earlier and going longer so that people understand interest rates, the perils of overcharging on credit cards, how to balance a checkbook, and the importance of keeping good credit records.
Contact MBJ staff writer Becky Gillette at email@example.com or (228) 872-3457.