Strapped Homeowners Turn to Bad Loans

The short-term loans can lead to bigger payback headaches.

ByABC News
February 10, 2009, 9:59 AM

April 12, 2008 — -- Ruby Thomas works at the county clerk's office in Cleveland and makes a good income. But like millions of Americans, when her adjustable mortgage rate spiked, she could no longer keep up with the payments.

"I was so overwhelmed and so overcome and just so worn out from trying to save my home that was supposed to be my retirement plan for my future," Thomas said.

One day driving home in Cleveland, she saw a brightly colored sign offering her what's called a "pay day loan." The woman working inside the storefront told Thomas that she could get her hands on $1,000 with no credit check and that all she needed was proof of income.

Thomas says she didn't read the fine print, and two months later, the loan company was threatening to take her to court if she didn't pay the loan in full. So Ruby wound up taking out another loan to pay off the first one.

Eventually she wound up juggling five loans with annual interest rates between 400 percent to 800 percent.

"No one explained it to me. No one made me know I was going to have to pay this large amount for borrowing money," Thomas said.

And there's nothing she can do because it is all perfectly legal.

While 13 states have implemented a cap of 36 percent on the annual rate loan centers can charge, Ohio is not one of them.

Mortgage counselors say that as the U.S. housing crisis gets worse some people are turning to these short-term loans with high interest rates to make ends meet.

In Ohio, where about one in 482 homes is currently being foreclosed, the industry is thriving. Pay day loan centers are opening everywhere you look. In fact, the Center for Responsible Lending says in the state of Ohio pay day loan centers now outnumber Burger Kings, Wendy's and McDonalds combined.

"People go to pay day lenders thinking this is going to get them over the hump," said Paul Bellamy, a mortgage advocate with the Equal Justice Foundation in Ohio. "In fact, it's the worst possible thing they can do. It will send them over the edge, and it is just inevitable foreclosure is going to follow."