Demetrius Johnson had no savings, no job and nowhere else to go.
So he went to a Speedy Cash in southeast Denver to get a loan. The storefront was adorned with neon signs promising fast cash, which Johnson said was as inviting as the Las Vegas Strip. And like in Sin City, he said, the house usually wins; within 10 minutes, he left the lender with $500 in hand, which he says he needed to help pay rent, car insurance and child care. Seven years later, he still hasn’t been able to pay back loan.
“Something that is very easy to grab can also cut you,” Johnson told The Colorado Independent. “There’s always these asterisks and small print.”
The loan morphed into an $800 bill, he says. And like nearly a quarter of people who take out these loans, he wasn’t able to pay it back. That’s because these companies often charge annual interest rates nearly 10 times that of a credit card when accounting for fees. For people like Johnson looking for quick cash, these loans can turn into years of debt.
“It’s legal loan sharking,” said Noreen Wilson, a financial well-being coach with Operation HOPE Inc, a nonprofit financial support group.
That’s why a group of advocates is working to pass a ballot initiative in November that would set a 36 percent interest rate cap on payday loans. The group, known as the Colorado Financial Equity Coalition, recently dodged an attempt to sideline the measure after the Colorado Supreme Court dismissed a legal challenge by the industry.
“There will be no more legal challenges,” says Corinne Fowler, one of the proponents of the ballot initiative. “The challenge now is to gather signatures and qualify for the ballot.”
Quick access to credit, but at a price
Lenders hand out hundreds of thousands of these “deferred deposit” loans every year, according to the Attorney General’s Office. These loans are designed to be fast and easy. Without a credit check, borrowers can leave lenders in a matter of minutes with cash in hand. When unexpected costs arise, like a broken washer or dryer, borrowers can get financial help quickly, says Jamie Fulmer, senior vice president of public affairs at Advance America, a payday lender that Fulmer says has 19 locations in Colorado.
“They come to our locations because they can get the access to credit that they need,” Fulmer said. He added, “many banks and credit unions don’t offer small loans.”
But this fast cash comes at a high cost: these lenders, on average, charge borrowers the maximum allowed under Colorado law, according to the Attorney General’s Office. So when the bill comes in, borrowers struggle to pay the money back — or in the case of Johnson, never do; in 2016, Colorado borrowers defaulted on 23 percent of all payday loans taken out that year, according to a 2018 report by the Center for Responsible Lending, a nonprofit research group based in North Carolina.
This kind of lending practice has roots in the early 20th century when salary buyers would give workers a partial wage payment in exchange for their next paycheck. This type of short-term, single payment loan is now commonly referred to as a payday loan, which has become shorthand for any high-cost deferred deposit loan, even if it can be paid off over months.
Lenders in Colorado can charge up to 45 percent interest in addition to a finance fee — equal to 20 percent on first $300 and then 7.5 percent on the remaining amount up to $500 — and a maintenance fee. In 2002, annual percentage interest rates on these loans, which includes fees, averaged as high as 400 percent, according to a report by the Attorney General’s Office.
This rate dropped dramatically after lawmakers in 2010 passed a law that extended the loan terms from two weeks to a minimum of six months, reducing the number of fees borrowers paid and the number of loans they took out help pay off prior ones. Before the law changed, borrowers took out an average of about eight loans from the same lender, according to the AG’s report.
Still, in 2016, the most recent data available, the average annual percentage interest on these deferred deposit or payday loans was 129 percent, which is nearly 10 times higher than the average credit card interest rate, according to the CRL report.
Borrowers on average take out two loans, which financial consultants say are used to pay off an older loan when interest and fees make paying back loans difficult, turning what was quick money into a cycle of debt.
“It might look like a quick fix, but it’s an illusion of help, because you get stuck in it,” said Melissa Duncan, a personal finance coach with mpowered, a nonprofit organization providing financial coaching.
Lawmakers made an unsuccessful attempt to cap interest rates at 36 percent as part of the reform package in 2010. Since then, no serious efforts to cap interest rates have been made in the state legislature.
“The bills around payday lending were controversial and ended up being rather bruising battles,” said Rich Jones, director of policy and research for the Bell Policy Center, a left-leaning think tank in Denver that helped work on the law change in 2010.
That’s in part why the coalition is pushing to place a limit on how much these lenders can charge through a ballot initiative to cap the annual percentage rate at 36 percent, which includes fees.
The industry is pushing back.
The 36 percent cap will make it difficult for lenders to earn a profit on these small, relatively short-term loans, Fulmer said, noting it may have the effect of putting some out of business.
“Folks should take caution when considering price-fixing measures,” he said. “Starbucks wouldn’t offer a cup of coffee for 35 cents.”
The owner of Emergency Cash in Denver, Bill Fritts, took the group working on the ballot initiative to the Colorado Supreme Court over the matter. His attorneys argued the initiative does not take into account impacts on the economy — namely that some businesses may have to shut their doors — and that voters should be aware of these impacts when they go to the ballot in November. They said they are also concerned by the use of the word “payday loan” in the initiative’s title, though the phrase “payday loan,” is used by many lenders on their windows. Lenders argue it’s a catchphrase that will create an unfair bias in support of the initiative.
The court earlier this month dismissed this case, which means the proponents of the initiative can start collecting the 98,492 signatures needed by Aug. 6 in order to get the initiative on the ballot for election day on Nov. 6.
Colorado wouldn’t be going at this alone. Eleven states have either capped payday loans at 36 percent or prohibited payday lending altogether, according to the National Conference of State Legislators. In South Dakota, nearly half of payday lenders chose not to renew their operating licenses after the state capped interest rates at 36 percent in 2016. And in 2005, when North Carolina capped interest rates at 36 percent, several major lenders left the state.
As for the borrowers in North Carolina, a 2007 study by the University of North Carolina concluded that they preferred to take out a bank loan or use a credit card rather than a payday loan for quick cash. And despite the closing of some payday lending locations, researchers concluded there was “no significant impact on the availability of credit for households.”
“It is clear from this research that low- to moderate-income consumers get along perfectly fine without payday lenders,” said Jones, of the Bell Policy Center.
Short-term loan has long-term impacts
Johnson says he made a career working at investment firms. He did not go to college, but he said his ability to take tests gave him a leg up in the field. At his peak, he says he held several security licenses, including Series 6, Series 7 and Series 63, which certain investment firms require, and at one point made about $80,000 per year.
But that all changed in 2011 when he was laid off from his office job at Scottrade and he took out a $500 loan.
He wasn’t able to afford the first $250 payment. Or any of the other payments. The phone calls from the lender eventually stopped, he says. By the time the loan was sent to collections, Johnson says he owed about $800, which means he was likely charged the maximum interest allowed under state law — 45 percent plus fees.
In 2013, Johnson was offered a $45,000 a year job from Fidelity Investments, prompting him to put in his notice to Transamerica, where he says he was working at the time. But he says Fidelity later rescinded this offer because of the unpaid payday loan on his credit. Again, he was unemployed.
“The biggest cost I think came in the form of my ability to earn an income,” Johnson says.
Johnson, now 40, says he’s moved beyond his career in investments. He is currently living with his mother, selling life insurance and trying to launch his own business, called DSquared Financial Strategies, which he said is a financial tech firm aimed at helping people budget and plan financially. He is also volunteering for the National Association for the Advancement of Colored People, an African American civil rights group, in an effort to regulate payday lenders, he says.
He acknowledges the irony of his situation — a financially literate man who sought a loan with exorbitant interest rates. He said he jumped directly into the workforce after high school to work. And, he said, he never learned to save.
“There was a piece missing,” he said. “While I was knowledgeable about investments, I was not very knowledgeable about household financial management. Those are two different skill sets.”
Late last year, he decided to start chipping away at this debt. But that’s when he learned from an attorney that the original loan had morphed into a $2,100 debt. By then, seven years had passed, and with it Colorado’s statute of limitations with some types of debt collection. Johnson learned that he could have this debt removed from his credit.
Johnson says he would like to see payday lending banned in Colorado, but would settle for a rate cap. He thinks about his experience in the abstract, he says, seeing it as both a personal issue and one symptomatic of a larger issue: the lack of access among people of color to traditional forms of credit. According to a 2010 report by CRL, payday lenders are 2.4 times more concentrated in African American and Latino communities. That may be partly because African Americans are more likely to seek out this easy source of credit, according to the report. And, according to Pew Charitable Trust research on the issue, the odds of an African American using a payday loan are 105 percent higher than for other races.
Johnson says he has been focusing on teaching. He recently took students from the Martin Luther King Jr. Middle School, where he went to school, to the Federal Reserve Bank of Kansas in Denver. He said one of the best ways to help people financially is through education.
And one silver lining to his current situation, he says, is that he is a living lesson for his daughter, Genevieve.
“It’s one thing to tell somebody something,” Johnson said. “It’s another thing to show them.”