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This post was updated on January, 3. 2011.

For Desperate Borrowers, a Spiral of Debt

Janelle Smith, a Bernal Heights social worker who asked that we don’t use her real name, is trying to crawl out of a hole.

A few weeks ago, her car was towed. She was behind on a couple of payments, and by the time she retrieved her car from Richmond, she was out $1,600.

She first turned to San Francisco Credit Union, where she’s been a customer for five years, for a loan. She was turned down. Friends and family fronted her the money she needed, and after paying them back, Smith was broke.

So, at her brother’s suggestion, she took out a payday loan of $200, paying $35 in fees — which translates to an Annualized Percentage Rate of 460.1 percent– to do so.

“It’s expensive,” she said, “But I really needed the money so I can’t complain too much.”

Two weeks later, Smith stood in line at Money Mart on the corner of 16th and Valencia streets, waiting to pay back her original loan and take out another.

“It’s my second time, and hopefully my last,” she said. If so, she’ll be in a rarefied group.

Nationally, only two percent of payday loans go to borrowers who take out a single loan and pay it back without taking out another payday loan, according to the Center for Responsible Lending.

Smith is one of the approximately 1.6 million Californians who take out payday loans each year. The state’s payday lenders made over more than 11 million loans totaling over $2.9 billion in 2007, according to the California Department of Corporations.

Payday lending is big business in California: no state has more payday lenders or a greater volume of payday loans made, according to the Center for Responsible Lending.

Twelve states, including Massachusetts and New York, prohibit payday loans outright. But in states like Nevada, Utah and South Dakota, payday loans are not regulated at all.

California limits the interest rates payday lenders can charge to 465 percent and requires lenders to disclose certain information to potential customers. But consumer advocates say the state doesn’t do nearly enough to protect payday borrowers. A group of consumer watchdog organizations, including Consumers Union and the National Consumer Law Center, gave California an “F” for its efforts to protect consumers from high interest rates for small loans last year.

It’s ironic that a state known for setting the standard for protecting consumers against toxic products has done little to protect them from risky financial services, said Ginna Green, a spokesperson for the Center for Responsible Lending. “California has been ground zero for the foreclosure crisis and payday loans are just another instance of that [lack of protection.]”

Getting the loans is easy. All you need is a bank account, two pay stubs and an ID. Getting out of debt can be considerably harder.

Like Smith, many payday loan borrowers first turn to payday lenders when they need quick cash to cover an unforeseen expense — a car repair, a prescription, an unexpected bill.

But, for people already living paycheck to paycheck, the high fees associated with these loans sink them deeper into debt, and they become repeat customers. Over half of payday borrowers in California take out loans at least once a month, according to a study published by the Silicon Valley Community Foundation in October. More than a third of those borrowers have taken out loans from multiple payday lenders simultaneously, the same study found.

Nationally, only two percent of payday loans go to borrowers who take out a single loan and pay it back without taking out another payday loan, according to the Center for Responsible Lending.

Payday lenders say their product provides a valuable service to people without access to other forms of credit. “While everyone else is cutting credit, we’re giving out loans,” said Jeff Kursman, director of public relations for Check’n’Go, a nationwide payday loan chain.

Many payday lenders argue that payday loan fees are cheaper than reconnecting the electricity or telephone.

They also say their steep fees correspond to the high risk they take in making the few-questions-asked loans to people who, for the most part, are struggling financially. But the risk is not as great as it would seem. Some 90 percent of the loans are repaid, according to the California Department of Corporations.

But many consumer advocates say payday lenders prey on the working poor, trapping them in a cycle of debt that isn’t easily overcome. “It’s irresponsible to loan money to people who don’t have a prayer of being able to pay it back,” said Jean Anne Fox, director of financial services for the Consumer Federation of America.

Just ask Mark Jones, a 56-year-old Mission resident who’s been taking out payday loans every month for the last three years. Standing in the California Check Cashing store on Mission Street, Jones, who asked that his real name not be used, said he’s on disability and earns some extra income by caring for the building he lives in. But his income falls short of covering his basic needs, so he depends on payday loans to make ends meet

“I pay rent and then I run out of money,” he said.

Though California law prevents payday lenders from making more than one loan to a consumer at a time, borrowers can take out loans from different payday lenders simultaneously. This isn’t hard in the Mission, where there’s a payday lender on practically every block of the neighborhood’s main thoroughfares.

But taking out one loan to pay off the last is where it gets really expensive. A typical borrower takes out nine loans a year. If they take out $300 initially, and continue rolling it over, like Jones does, for nine months, they end up paying $800 for that $300 of credit.

Jones says he knows payday loans are expensive, but he doesn’t see a way out. “It’s a cycle, but I have to do it every month to make ends meet. It’s good to have the cash,” he said.

This is the second part of Quick Cash, Quicksand, a series about payday lenders and check cashers in the Mission. Click here to read the first story.