Borrow $5,000, repay $42,000
JoAnn Hesson, sick with diabetes for years, was desperate.
After medical bills for a leg amputation and kidney transplant wiped out most of her retirement nest egg, she found her Social Security and small pension weren’t enough to make ends meet.
As the Marine Corps veteran waited for approval for a special pension from the Department of Veterans Affairs, she racked up debt with a series of increasingly pricey online loans.
In May 2015, the Rancho Santa Margarita resident borrowed $5,125 from Anaheim lender LoanMe at the eye-popping annual interest rate of 116%. The following month, she borrowed $2,501
[Loans, from Ohio firm Cash Central at an even higher APR: 183%.
“I don’t consider myself a dumb person,” said Hesson, 68. “I knew the rates were high, but I did it out of desperation.”
Not long ago, personal loans of this size with skyhigh interest rates were nearly unheard of in California. But over the past decade, they’ve exploded in popularity as struggling households — typically with poor credit scores — have found a new source of quick cash from an emerging class of online lenders.
Unlike payday loans, which can carry even higher annual percentage rates but are capped in California at $300 and are designed to be paid off in a matter of weeks, installment loans are typically for several thousand dollars and structured to be repaid over a year or more. The end result is a loan that can cost many times the amount borrowed.
Hesson’s $5,125 loan was scheduled to be repaid over more than seven years, with $495 due monthly, for a total of $42,099.85 — that’s nearly $37,000 in interest.
“Access to credit of this kind is like giving starving people poisoned food,” said consumer advocate Margot Saunders, an attorney with the National Consumer Law Center. “It doesn’t really help, and it has devastating consequences.”
These pricey loans are perfectly legal in California and a handful of other states with lax lending rules. While California has strict rules governing payday loans, and a complicated system of interest-rate caps for installment loans of less than $2,500, there’s no limit to the amount of interest on bigger loans.
State lawmakers in 1985 removed an interest-rate cap on loans between $2,500 and $5,000. Now, more than half of all loans in that range carry triple-digit interest rates.
In 2009, Californians took out $214 million in installment loans of between $2,500 and $5,000, now the most common size of loan without a rate cap, according to the state Department of Business Oversight. In 2016, the volume hit $1.6 billion. Loans with triple-digit rates accounted for more than half, or $879 million — a nearly 40-fold increase since 2009.
The number of loans between $5,000 and $10,000 with triple-digit rates also has seen a dramatic 5,500% increase, though they are less common. In 2016, those loans totaled $1.06 billion, with $224 million carrying rates of 100% or higher.
Many of the loans can be tied to just three lenders, who account for half of the triple-digit interest rate loans in the popular $2,500to-$5,000 size range. LoanMe, Cincinnati firm Check ‘n Go and Fort Worth’s Elevate Credit each issued more than $100 million in such loans in 2016, as well as tens of millions of dollars of loans up to $10,000 with triple-digit APRs.
Lenders argue they need to charge such high rates because the majority of these loans are unsecured: If borrowers stop paying, there are no assets for lenders to seize.
“Lenders don’t have a meaningful way to recover from a customer who walks away from it,” said Doug Clark, president of Check ‘n Go. “There’s a segment of the population that knows that and has no intention of paying us.”
For these borrowers, pawn shops and local storefront lenders used to be the most likely options, but those businesses can’t match the volume or convenience of today’s online lenders, which can reach millions of potential borrowers on the internet.
Many banks don’t offer personal loans at all — and certainly not to customers with weak credit looking for fast cash. After the financial crisis, banks reined in their credit card offers and stopped offering mortgages and home equity loans to customers with bad credit.
Additional regulation or interest rate caps would further cut those individuals out of the financial system, lenders argue.
“Unfortunately, banks and other traditional lenders refuse to make needed loans to a large segment of the population,” LoanMe executive Jonathan Williams wrote in an emailed statement. “We believe that these borrowers should be given the option to borrow at these higher interest rates rather than lose access to all credit.”
The cap on the size of payday loans also has played a role. In California, after fees, the most a customer can walk away with is $255.
Clark of Check ‘n Go, which for years offered only payday loans, said many of his customers switched to installment loans once the company started offering them in 2010.
“Consumers need larger amounts and more time to pay,” Clark said. “Demand was there.”
There’s a lot of room between $255 and $2,500. But many lenders — like LoanMe, Elevate and Check ‘n Go — simply choose not to offer loans in the middle, as they are subject to rate caps.
Marketing deluge
High-cost lenders attract consumers in part by spending heavily on advertising, bombarding Californians with direct mail, radio jingles and TV ads promising easy money fast. LoanMe alone spent $40 million on advertising in California in 2016, according to its annual report to the Department of Business Oversight.
In one ad, LoanMe promised “from $2,600 to $100,000 in as fast as four hours with no collateral — even if you’ve had credit problems.”
Lisa Servon, a professor at the University of Pennsylvania who worked at a check-cashing store and a payday lender while researching her recent book — “The Unbanking of America: How the New Middle Class Survives” — said consumers with an urgent need for money aren’t in a position to shop around or wait even a few days for an approval.
“How much time from the moment I apply to the moment I have money in my hand?” she said. “That’s what people want to know.”
Caren Jefferson found herself in just such a situation two and a half years ago. The 50-year-old South Los Angeles resident, who had uterine cancer, was frequently overdrafting her bank account and desperate to pay bills. She estimated it took 24 hours or less for LoanMe to deposit $3,000 into her bank account.
Jefferson said she wasn’t told the loan carried a 135% interest rate or that after an initial payment of $267 she would owe $351 a month for just shy of four years — though she clicked quickly through the online application without reading much of it.
A real estate escrow officer, Jefferson made only one payment before she started overdrafting again. She told LoanMe’s customer service department that she had made a “big financial mistake.”
“Being desperate for money may lead one to make a bad/hasty decision,” she wrote the company in October 2015, according to a letter contained in a lawsuit she filed alleging unfair debt collection practices by LoanMe. “I have to rob Peter to pay Paul and someone will go unpaid.”
Many consumer advocacy groups consider these loans predatory by nature, with desperate borrowers taken in by aggressive marketing and promises of quick cash.
“They’re exploiting people’s financial hardships,” said Liana Molina of the California Reinvestment Coalition. “You can’t make a rational decision when you’re in a moment of crisis.”
What’s more, advocates argue that installment loan companies do little to determine whether borrowers can repay a loan, because it’s just not that important to them.
“As long as the borrower pays long enough before defaulting, a high-rate installment loan will be profitable,” the National Consumer Law Center said in a 2016 report.
If a borrower, such as Jefferson, makes only a few payments, a lender is certainly losing money. But if Jefferson had made a year’s worth of payments, LoanMe would have received $4,129, about $1,000 more than she borrowed — and Jefferson would still be on the hook for more than $12,000 in payments.
Many lenders, including LoanMe, Elevate and Check n’ Go, do not charge a prepayment penalty, so borrowers can save thousands of dollars if they pay off their loans early.
Al Comeaux, a spokesman for Elevate, pushed back against the notion that lenders don’t care if borrowers can’t pay back their loans. His company won’t lend to customers whose loans are charged off, and Comeaux said Elevate wants to try to keep its customers.
In part, that’s because new borrowers are expensive. The company spends as much as $300 on advertising and other measures to bring in new customers. Return borrowers are cheaper, less prone to fraud and potentially more profitable, even though they generally pay lower rates.
What’s more, Elevate loans, on average, are scheduled to be repaid in 14 months, according to the company’s report to California regulators.
But many lenders allow much longer terms, increasing the likelihood that borrowers will pay for years and still end up owing.
LoanMe’s loans issued in 2016 were scheduled to be repaid in just under five years on average, according to its state report.
Borrowers often need to provide only basic personal information, such as a name, address, Social Security and checking account numbers. Lenders will use bank records and online databases to check income and creditworthiness.
Ken Rees, chief executive of Elevate, said his firm’s borrowers have enough income — $72,000 annually on average in California — to make monthly loan payments and meet their other obligations.
“Our customers have integrity and want to pay off their loans, but they may have things outside their awareness or control that will affect their ability to repay,” he said, noting factors such as a job loss, illness or divorce. “There are limitations to what you can do, even with advanced analytics.”
In the case of Hesson, the LoanMe borrower who has diabetes, it might not have taken advanced analytics to know she’d run into trouble.
When Hesson applied for her $5,125 loan in May 2015, she had just received the last monthly payment from a long-term disability insurance policy. Without that $1,900, she had income of about $2,900 a month from Social Security, alimony and a small pension.
Her rent at a seniors-only apartment complex plus utilities and monthly payments for two larger loans totaled about $2,600.
LoanMe payments added $495, bringing her total obligations to $200 more than her monthly income. And that’s without even considering her medical bills, or food, cable, internet access and other miscellaneous expenses.
In an emailed statement, LoanMe’s Williams said bank statements and a credit check indicated that Hesson had enough income after other loan obligations to make her monthly payments. It’s not clear whether LoanMe considered basic living costs or knew Hesson’s income had recently changed. Williams did not respond to follow-up inquiries by The Times.
“LoanMe employs a rigorous underwriting process that strives to ensure that borrowers can, in fact, afford their repayment obligations — with full consideration of their other debts,” Williams wrote, adding that it’s “patently untrue” the company makes loans to people who can’t afford them.
Molina of the California Reinvestment Coalition said that some lenders are not doing even the most rudimentary underwriting.
“If your income can’t withstand the debt, that’s not the right thing to do,” she said.