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Up to 10 pct of Virginia households use high-cost loans

RICHMOND, Va. — Nearly 10 percent of Virginia households have used short-term, high-interest payday, pawnshop and auto-title loans to make ends meet.

A study by the University of Virginia’s Weldon Cooper Center for Public Service released Tuesday shows that more than 275,000 financially struggling families in Virginia have turned to alternative financial-service providers to pay for basic needs such as food, housing and transportation. They also are using the high-cost loans to pay for unexpected expenses stemming from job losses, car repairs and medical bills.

A previous Cooper Center study showed that nearly 25 percent of Virginia households don’t earn enough money to meet their basic needs, and about 28 percent lack cash savings, stocks or other financial assets to cover short-term emergency expenses. Such low-income families often turn to such alternative loans, which further erode their financial security, study author Rebecca Tippett said.

“These alternative financial services target the working poor, those working but not making ends meet,” Tippett said. “When these products undermine the ability to build financial security for themselves, we all bear the cost of that.”

Compared to mainstream banks and credit unions, alternative financial-services companies offer smaller loans and shorter loan terms at substantially higher interest and fees — climbing into triple-digit annual percentage rates when all interest and fees are factored in.

Nearly 120,000 Virginia households — 4 percent — used payday loans, according to the study, which analyzed 2009 national banking statistics from the Federal Deposit Insurance Corporation. In such loans, the borrower writes the lender a postdated check for the loan value plus fees. The lender cashes the check if the borrower misses the repayment deadline, and sometimes imposes additional fees and penalties.

More than 95,000 households — 3 percent — reported using pawn loans, and more than 100,000 households — 3.6 percent — used rent-to-own stores to lease furniture, appliances and other high-cost items. Between 2004 and 2008, 70,000 Virginia households reported using tax-refund anticipation loans, in which the borrower takes out a loan on their annual tax refund, according to the study.

Over a four-year period that ended in 2009, nearly 150,000 Virginia households reported using an auto-title loan, in which the lender can repossess the vehicle if the loan isn’t repaid.

“In some poor households the vehicle is the biggest portion of household wealth,” Tippett said. And losing the vehicle also harms families because it’s critical to have transportation to get to work, she said.

Virginia is one of 22 states that allow lending from all types of alternative financial-services providers, though the state has started to regulate payday and auto-title loans. Twenty-six states and the District of Columbia have banned auto-title lending and 13 states have prohibited payday lending.

The analysis of federal banking statistics also shows that black Virginia households are significantly more likely than white families to report using such alternative-lending providers. Such businesses are disproportionately found in urban areas, in neighborhoods with higher concentrations of black residents, based on Census statistics.

A quarter of Virginia’s alternative financial services providers are located in Hampton Roads, the area with the highest black population, the study showed.

Twenty-one percent of black Virginians live in a Census tract with only payday, auto-title and other alternative institutions, compared to 13 percent of white and 15 Hispanic Virginians. Neighborhoods with higher proportions of black people have correspondingly higher proportions of high-cost alternative lenders, the study found.

The study didn’t examine whether such businesses establish themselves in black neighborhoods because residents are more likely to use such loans, or whether people are using the loans because the shops are convenient to them, Tippett said.

The U.Va. study also found that more than 90 percent of users of alternative lending do have a conventional bank account. But perhaps they still use the short-term loans because they’re easier to obtain than those from banks and credit unions, the businesses are more convenient than mainstream providers, and the borrowers don’t qualify — or don’t think they qualify — for conventional bank loans.

“Definitely what this all points to is both a need to develop alternative products and to figure out ways to make people who currently are uncomfortable with banks comfortable with banks,” Tippett said.

State Corporation Commission figures released last month show that Virginia car-title lenders issued nearly 25,000 loans worth more than $21 million in the last quarter of 2010, according to initial data collected since the state started regulating the lenders. A law took effect in October that limits how much the companies can charge, how much they can lend and for how long. Despite the protections, more than 3,500 borrowers missed payments for at least 60 days during those three months, and nearly 200 had their vehicles repossessed.

State laws enacted in 2008 to curb the repeated use of payday loans have dramatically reduced their use. The total value of payday loans made in 2009 was $170.5 million with interest and fees of $40.3 million, down from $1.3 billion, according to data from the SCC’s Bureau of Financial Institutions.

“These products may serve a need but there may be significantly better ways to meet the need,” Tippett said. “This is important for policy makers at the local, state and national levels to continue to explore.”