Utility companies make is easy for many households to pay utility bills in person, and avoid the cost of transportation or postage.
Unfortunately, more and more often, the service exposes those who can least afford it to some of the most expensive credit in the nation.
The beleaguered payday loan industry is under attack again, this time for partnering with utility companies looking to cut overhead by hiring payday lenders to accept electricity, natural gas and telephone bills.
The National Consumer Law Center's (NCLC) new report, "Utilities and Payday Lenders: Convenient Payments, Killer Loans," argues that utility companies shouldn't send its customers to payday lenders because that places consumers at risk for predatory loan pitches.
The NCLC report compared utility payment agents listed with 21 utilities against a nationwide database of licensed payday lenders and found 650 where accepting utility company payments.
NCLC warns consumers already so tight on cash they seek to save money on stamps and transportation by walking into a payment center are vulnerable to quick loans offered by payday lenders who act as utility payment agents.
The study points to a average annual interest rates on payday loans that start at 390 percent and says when the payment comes due, consumers frequently roll over short-term loans or take out multiple loans, trapping them in a vicious cycle of debt.
Industry trade group since 1999, the Community Financial Services Association of America (CFSA) says the newest slam contains the same misleading information about the industry.
Utility payment services are a free service separate from the payday loan business and the CFSA says the "cycle of debt" claims and others made by payday loan studies are simply myths.
The association, which has developed a website heavy with consumer information, likens a payday advance to a "financial taxi" used by consumers who need to get from one payday to the next when faced with an immediate need and will spend some extra cash for the ride.
The association says to obtain an advance, customers must have an active checking account, proof of income and proper identification and they must complete an application for the loan.
They must sign an agreement with Truth in Lending Act disclosures the provide transaction terms and costs in both dollars and annual percentage rate.
Customers must write a personal check for the advance plus a fee, the cost of the loan. The check is held for the agreed time period, usually about two weeks. Once the due date arrives, the check is cashed or the customer returns to pay the debt.
The industry says payday loans are designed as two-week loans, not year-long debts and the typical fee charged by payday lenders is $15 per $100 borrowed, or a simple 15 percent for a two-week duration. If a loan with that rate was rolled over 26 times, for a full year, the APR would reach $390, the association concedes, but that doesn't typically happen.
Some states limit rollovers and CFSA members themselves are limited to rollovers mandated by the state's limit or to no more than four, the association says.
Based on what CFSA says is the actual cost of the loan, payday loans are a better deal than other alternatives strapped consumers could face, according to CFSA's own studies.
It says a $100 bounced check could cost an average $54 in non-sufficient funds or merchant fees -- a 1,409 percent APR; a $100 credit card balance with a $37 late fee -- a 965 percent APR (not to mention the possibility of triggering a higher interest rate) and a $100 utility bill with a $46 late/reconnect fee would amount to an 1,203 percent APR.
But the Center For Responsible Lending say there are many additional alternatives for households facing brief stints of financial distress.
Creditors will often negotiate partial payments; some employers grant paycheck advances (checking accounts primed with direct deposits do the same); credit counselors can help households cure more than just the symptoms; faith-based and community groups provide emergency financial assistance and credit unions, military lenders and others offer short term loans that are cheaper than payday loans. Even a credit card cash advance can be cheaper, according to the center.
The key, consumer advocates say, is making suitable spending, budgeting and, when possible, income adjustments to prevent a "cycle of debt" from any source.
NCLC, CRL, the AARP and others report that there are too many unscrupulous payday lenders who aren't trade group affiliates, either don't follow existing law or operate where regulations are limited and prey upon certain vulnerable demographic groups.
CRL, for example, says:
- Ninety-nine percent of payday loans go to repeat borrowers.
- The average payday borrower is flipped eight times by a single lender.
- African-American neighborhoods have three times as many payday stores per capita as white neighborhoods in North Carolina, even when income is taken into account.
- Proximity to military bases is a powerful predictor of a high number of payday loan shops.
- The average payday borrower pays $800 to borrow $325.
Critics say payday lenders' role as utility payment agents gives them too much more room to prey.
The NCLC say an estimated one in four utility customers -- including many minorities, women and low-income customers -- opt for in-person bill payment. Outsourcing has grown as utilities have sought to cut costs of bill payment services.
Says Jean Ann Fox, director of consumer protection for Consumer Federation of America, "Consumers paying utility bills in person to avoid disconnection should not be directed to high-cost payday lenders. Utilities should not contribute to the payday loan debt trap."
