Strapped Homeowners Turn to Bad Loans

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."

Bellamy says people are so optimistic and think "'if I can just get to the next pay day I'll be able to get out of the hole and get this thing paid off and put it behind me.' In fact, the industry counts on that kind of optimism and the next thing you know you're coming back again and again and again, very often to the competitors across the street … and the next thing you know you're one of the average pay day borrowers that's borrowed 13 times in a year. And you get hooked into the pay day trap."

The Center for Responsible Lending claims the average borrower ends up paying back $793 for a $325 loan.

"This is legalized loan sharking," said Paul Ollio, with the Ohio Center for Responsible Lending. "You have a growth in an industry that has tried to fill a gap that is exploiting millions of people."

But pay day lenders dispute these claims. They say that they make the interest rates very clear and that their research shows pay day loans help some people avoid bankruptcy and retain their homes.

Still, some Ohio legislators have introduced legislation that would cap the loans at 36 percent. Other states are considering similar legislation.

New laws won't help Thomas, though. She lost her home and now is living in a rental apartment. She is still thousands of dollars in debt.