States target payday lenders and their high rates

PHOENIX — When Jeffrey Smith needed some quick cash to pay a medical bill, he turned to a payday loan store near his home outside Phoenix.

He eventually took out a string of payday loans and fell into a vicious cycle in which he would call out sick from work so he could drive all over town to pay off loans and take out new ones. The experience left him in bankruptcy, lying to his wife and fighting thoughts of suicide.

Stories like Smith's and a growing backlash against payday lending practices have prompted legislatures around the country to crack down on the businesses.

In the most severe case, Arizona lawmakers are on the verge of shutting down the entire industry in the state. A law took effect in Washington this year capping the amount of payday loans and the number that a borrower can take out in a year. And in Wisconsin, lawmakers are locked in a heated battle over whether to regulate the industry.

Payday lenders say they are providing an important service, especially in a dreadful economy where people are short on cash. Detractors say the industry preys on desperate people with annual interest rates that routinely exceed 400 percent.

"It's sort of like a twisted person that's standing on the street corner offering a child candy," Smith said. "He's not grabbing the child and throwing him into a van, but he's offering something the child needs at that moment."

Payday loans are short-term, high-interest loans that are effectively advances on a borrower's next paycheck.

For example, a person who needs a quick $300 but doesn't get paid for two weeks can get a loan to help pay the bills, writing a postdated check that the store agrees not to cash until payday. The borrower would have to pay $53 in finance charges for a $300, two-week loan in Arizona — an annual interest rate of 459 percent.

Payday loan stores are ubiquitous in Arizona, especially in working-class neighborhoods of Phoenix where the businesses draw in customers with neon lights and around-the-clock hours.

Payday lenders in Arizona several years ago were granted a temporary exemption from the state's 36 percent cap on annual interest rates. The exemption expires June 30, and the industry says the interest cap is so restrictive that it will have to shut down entirely.

Bills that would have kept the industry alive languished in the House and Senate, and the year's third and final attempt was pulled Tuesday amid a lack of support.