Options abound for the desperate without credit
By Dave gathman dgathman@stmedianetwork.com April 9, 2011 5:52PM
Owner Lee Amberg offers a price for an old balance scale that Latonya and brother Tito Casas brought in Thursday to Windy City Jewelry & Loan on North McLean Blvd. in Elgin. Casas' eventually parted with the scale to develop a relationship with the local business, in which Amberg said he will display it in the store. April 7, 2011 | Michael Smart~Sun-Times Media
Updated: June 9, 2011 5:24AM
You’re desperate. Maybe the transmission has just fallen out of your 1998 Accord. Or the boss has cut your hours and the rent is overdue. You have a job or maybe some welfare or unemployment income. But maybe your credit record is, shall we say, a little ugly. Maybe you don’t have a checking account, and because of that bad credit score, no regular bank wants you as a customer. Maybe you’re in the country illegally and don’t have a Social Security number.
Well, if you’re in the neighborhood of McLean Boulevard and Big Timber Road, you’re in luck. Right at the corner is a gigantic PLS payday loan store that will lend you a few hundred bucks pretty easily — if you don’t mind an interest rate that Illinois Attorney General Lisa Madigan’s office describes as “legalized loan sharking.”
If PLS rejects you, a block down the street along McLean you’ll find a smaller payday loan store called Fast Cash In A Flash. Right next door to that you can trade your wedding ring for cash at Marelli’s Gold Exchange.
And right across the street from those two is Elgin’s first and only pawn shop, Windy City Jewelry & Loan, where you can borrow anywhere from $50 to $63,000 by leaving that wedding ring, or maybe your high school clarinet, as collateral.
That neighborhood may be unique in the concentration of such businesses, but not in the presence of them. Since the early 1990s, 10 or more payday loan stores have popped up around Elgin and in surrounding villages. And since the value of gold and silver began shooting toward astronomical levels, an equal number of gold-buyback places have popped up.
Many misconceptions
Of all the ways to get money fast, the pawn shop has the seediest reputation. But thanks to government controls, it actually may be the most respectable of these venues where you can borrow money or sell something. In fact, it could be one of the wisest choices for someone who’s desperate but doesn’t qualify for a low-interest bank loan.
Owner Lee Amberg and manager Stacy Wetstone, who opened the Elgin Windy City Pawn Shop in January, said generations of crime stories have left people with “a lot of misconceptions” about their trade: that people bring items to a pawn shop, get money for them and never come back again; that pawn shops are the main way for burglars to fence stolen goods; and that the shops are frequented mainly by the poor.
Actually, Amberg said, people should look at a pawn shop as more like a loan company than a flea market. Customers take out loans for 60 days each and turn over merchandise as collateral to guarantee that loan. If the customer doesn’t pay off the loan, the item becomes the property of the shop and is set out for sale in the shop’s showroom.
It’s too soon to say what Elgin customers will do, Wetstone said, but in the Windy City pawn shop they have operated for 23 years in Evanston, 89 percent of the customers eventually pay off their loans and reclaim the item they brought in.
The charge for those loans is 3 percent interest per month, or the equivalent of 36 percent a year. That’s a lot compared to most bank loans or even credit cards. But it’s drastically less than what is charged by payday loan and car title loan stores, as we shall see. Also, the shop doesn’t even check on the customer’s credit history, and, if they default on the loan, that is not reported to the credit bureaus, either.
“We don’t really want to own your watch. We want to get our loan money back and collect our interest,” Amberg said. “So we work with borrowers. I’ll call them up and ask if they remember that their loan is due Monday.”
Windy City also charges a fee to cover the cost of storing and insuring each item, which Wetstone says varies according to the item.
By law, Wetstone said, every customer has to present a photo identification, and the serial number of each item is recorded. “Nationwide, only one-one-thousandth of 1 percent of stolen items show up in a pawn shop,” Amberg said.
“You develop a sixth sense,” Amberg said. “If someone brings in something worth $1,500 and I offer him $120 and he says, ‘Sure,’ that item is probably stolen. If I plug it in and ask him to show me how it works and he has no idea, that’s suspicious.”
“Working in a pawn shop, you have to learn about a lot of different things,” Wetstone said. All long-term employes at Windy City study to become certified diamond appraisers. A large proportion of what customers bring in is electronic products, so the employees have to learn how to work those.
As for estimating a fair value, “the Internet has been a godsend,” Wetstone said. “We used to have piles of blue books for all different kinds of used merchandise.”
Not everything does get redeemed, however, as a salesroom full of assorted merchandise attests. Glass cases hold jewelry and rings that borrowers never reclaimed. There are lots of musical instruments and electronic appliances — nine guitars, a Noblet clarinet, stereo speakers, some laptops and DVD players. A 19-inch TV is offered for $58.88, a 20-inch for $698.88.
A framing nail gun is priced for $198.88. “That was turned in as collateral by a contractor who had no work and couldn’t pay his guys,” Wetstone says sadly.
“My typical customer is not the destitute person,” Amberg said. “It’s the middle-class person whose transmission has gone out or who has lost his job and can’t pay the taxes. We had a rush of people right before the Cook County property taxes came due on April.
“The biggest loan I ever made, in Evanston, was for $63,000. A man had showed up at the closing to buy a house and found out he owed $63,000 more. The loan was secured by a lot of different items.”
‘Legalized loan sharking’
“Illinois now has more payday loan stores than McDonald’s,” then-Lt. Gov. Pat Quinn said in 2004. He was holding a press conference urging conventional banks to provide alternatives to an industry that charges interest rates once enjoyed only by guys in back alleys who promised to break your legs if you failed to keep up with your payments.
Last June, six years after he spoke, the now-Gov. Quinn signed into law a bill really cracking down on the payday loan industry — in part by limiting the interest its stores can charge to no more than about 400 percent on an annual percentage basis.
Heck, before that, some operators were charging 1,300 percent.
On the official website of Illinois Attorney General Lisa Madigan’s office, www.illinoisattorneygeneral.gov, Madigan’s staff goes one step beyond that.
“Because of their extremely high interest rates and many charges and fees, payday loans and installment loans are truly legalized loan sharking,” the website warns consumers. “You should exhaust all possible resources — family, church, friends — before you even consider taking out one of these high-cost loans.”
PLS Financial, a Chicago-based chain employing 3,000 people in nine states, got its name from the phrase “payday loan store.” Its stores on North McLean and at National and State streets in Elgin proclaiim “Payday Loans” and “Car Title Loans.” But PLS President Robert Wolfberg said that technically, the chain doesn’t do payday loans anymore.
According to the nonprofit Illinois Legal Aid organization and the state’s attorney’s office, the classic payday loan worked like this: A person would borrow money for a term that might be as short as two weeks — until the borrower’s next pay day — or as long as a few months. Often, he would pay the interest each two weeks or so and then pay the principal back as one big balloon payment at the end.
Often, the lender required the borrower to hand over a check for the amount of each payment, post-dated for the day each payment was due.
The borrower often was unable to make that balloon payment at the end, by which time he often had paid more in interest than the amount he had borrowed. So the loan company would persuade him to “roll over” the loan into a new loan. The debt tended to go on forever.
Despite their generous limits on interest rates, the 2010 Payday Loan Reform Act and a related one in 2005 include safeguards to protect borrowers from getting stuck in endless, escalating debt. The acts ban balloon payments, limit how loans can be rolled over, limit how many consecutive days a borrower can be in debt to the same lender, ban most fees and limit how big a percentage of a new borrower’s income can be devoted to loan payments.
Wolfberg said PLS and 90 percent of the similar firms in Illinois now offer only “fully amortized installment loans.”
Wolfberg said the typical PLS customer must pay interest every two weeks equal to 15.5 percent of the principal remaining unpaid. The borrower pays a fixed amount each week if he gets paid every week, or each two weeks if he gets paid every two weeks.
Wolfberg said a borrower will be turned down if he has no job or other source of steady income. But like the pawn shop, PLS does not check customers’ credit records or report bad loans to the credit bureaus.
Wolfberg said car title loans are another big part of such stores’ business. A borrower puts up as collateral the title to his paid-off car. He then can obtain a loan of up to $4,000 for six months, with interest of $33.33 per month for each $100 borrowed.
Spying on the competition
What does a typical payday loan look like? To spy out the competition, pawn shop owner Amberg sent one of his employees to apply for a $100 loan from the PLS store down the street. The loan papers the man brought back show he must pay $18.76 every two weeks for 12 payments. The total interest cost of having that $100 for about half a year comes to $125.11. That equals an annual percentage rate of 400.26 percent, according to the documents.
But Wolfberg argues that that intimidating percentage rate is misleading, since the borrower finishes paying off the loan and paying interest long before a whole year has passed.
“If you were staying in a hotel and paying $200 a night, would you say that the hotel was charging you $73,000 a year?” Wolfberg asks. “It’s more accurate to say that our borrower is paying 15.5 percent every two weeks.”
Only 15 percent of PLS customers default on their loans, he said.
“Banks and credit unions do not offer short-term unsecured loans,” Wolfberg said. “For most customers, all they need is a little help between paydays to cover a car repair expense or some other minor expense. PLS is there to help.”
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