How small short-term loans draw vulnerable borrowers into big long-term debt

By Siri Bulusu

KANSAS CITY, Mo.– Elliott Clark was working a shift as a security guard when his daughter called to tell him his wife had broken her ankle in two places.

She would need surgery to implant a metal plate and two screws in her foot.

Over the following six months, his wife rehabilitated at their Kansas City home while the disabled Vietnam veteran carried the family’s financials on his own. That meant paying $45,000 in hospital bills in addition to allowances for his two college-bound daughters, a mortgage, car insurance, and home utility bills.

Clark resorted to short-term borrowing, more and more, at high interest rates permitted by Missouri law.

“I got a $500 payday loan to help pay off my bills,” Clark said in a recent interview. “I had to keep my head above water, but I was still drowning.”

Clark’s initial payday loan helped sustain him for a short while, but paying off the entire balance upon receipt of his paycheck meant falling behind on bills again. He paid $25 toward his loan balance and rolled his loan over.

“I was working 80 hours a week to make overtime to help pay everything off,” Clark said. “But that payday loan was quicksand.”

Clark ended up rolling over his initial $500 payday loan three times, the legal limit for rollovers in Missouri.

“I got the first one paid off. Then I took out another one,” Clark said. “It was the only choice I had and over the course of three or four months I had taken out four loans.”

Clark took out payday loans from Quik Cash, National Cash Advance, Speedy Cash, Just Say Cash and Check Smart — all located in the Kansas City area. Over the next five years, the interest and fees on Clark’s multiple payday loans amounted to $58,000.

These lenders were not responsive to phone calls seeking comment for this story.

The non-amortizing nature of payday lending in Missouri can be traced back to 1990 with the enactment of Section 408.500 of Missouri law which removed interest caps on unsecured loans under $500, allowing lenders to charge whatever interest rates they deemed appropriate.

Moreover, according to a report by the Better Business Bureau, the Missouri legislature in 2012 allowed lenders to charge 75 percent interest on loans with two-week terms, equivalent to an annual percentage rate of 1,950.

“The payday loan is designed not to be paid off,” said Molly Fleming, payday lending expert at PICO National Network, a faith-based national organization.

Fleming said most borrowers use payday loans to cover day-to-day living expenses and not one-off emergency expenses, resulting in the average borrower’s remaining in debt for longer than the intended two-week period.

“When lenders say they’re offering a viable credit option for low- income communities, it’s laughable,” Fleming said. “These loans are opaque, obscure and intended to mislead vulnerable people into debt traps.”

Payday lending is defended by the Community Financial Services Association of America, a trade association based in Washington, D.C., that advocates for members’ policy interests on the federal and state levels.

Citing a March 2015 study commissioned in part by the CFSA, a spokesperson for the trade group said: “More than nine in ten borrowers agree that payday loans can be a sensible decision when consumers are faced with unexpected expenses, while 60% of borrowers believe that payday loans are fairly priced for the value they provide, especially when compared to alternatives.”

The CFSA spokesperson said payday loans act as a bridge to get borrowers to their next paycheck and are the least expensive option, especially when compared to fees from bank overdrafts and late bill payments.

Even regulated payday loans can reach exorbitant interest rates when rolled over for a full year, the spokesperson acknowledged, but “costs can be lowered by increasing competition in the marketplace, that is, expanding the number of products and players for consumers to choose from.”

The CFSA spokesperson said that member lending companies are working at the state level to introduce new laws that would make it easier to offer new products with longer repayment terms.

At the same time, however, the Consumer Financial Protection Bureau, an independent government body that acts as a watchdog for financial products, is planning to announce this spring new regulations that could make creating new credit products more challenging for payday lenders.

The CFSA is wary of these prospective rules. “We believe regulations serve a purpose in governing the marketplace and ensuring important protections are in place for consumers,” said the CFSA spokesperson. “But there is a delicate balance between protections and maintaining access to credit. If regulations are overly restrictive, the consequence is the elimination of credit.”

Fleming, of the PICO National Network, is doubtful new regulations will eliminate the predatory loan problem if they do not also address new products offered by the same lenders under such names as consumer installment loans and title loans, which can go up to $10,000 and carry similarly-high interest rates.

A report by Pew Charitable Trusts states that 76 percent of loans are renewals or quick re-borrows, and only 14 percent of the borrowers can afford the more than $400 needed to pay the loan within term.

Each of Elliott Clark’s five loans was intended to cover the prior, until he was paying over $500 every two weeks to keep up.

“I was working myself to death,” Clark said. “If I had been able to go to the bank I could’ve handled it all but the bank wasn’t interested in me because I had bad credit.”

In 2010, Clark’s bank repossessed his home, claiming he had fallen behind on restructured mortgage payments.

“No matter what I did I could not win,” Clark said. “Like I said — quicksand.”

The CFSA spokesperson admitted that unscrupulous lenders may charge extortionate rates and then sue borrowers for outstanding balances.


CFSA Best Practices guidelines state that a member will not press criminal charges against its borrowers. However, debt collection is a civil matter, which the CFSA does not mention in Best Practices.

The Missouri Courts database shows 82 cases in which QC Holdings, Inc., one of the largest payday lending companies in Missouri, is the plaintiff against overdue borrowers. QC Holdings is a corporate member of the CFSA.

Many cases brought against borrowers result in judges issuing default judgments for the plaintiff due to borrowers’ inability to procure legal counsel. On rare occasions, however, borrowers are let off on a technicality, usually a small gap in the contract that absolves the individual of wrongdoing.


QC Financial Services Inc., also known as Quik Cash, operates over 400 branches. (Siri Bulusu/MEDILL)

Still, even a pro-lender decision cast aspersion on the payday industry.

In a 2015 class-action ruling for lenders by the Missouri Court of Appeals, Judge Robert G. Dowd wrote a concurrence condemning lenders for manipulating Section 408.500 to reflect the interest of lenders, and said short-term loans “in a relatively short period of time, can become an unsurmountable debt.”

Judge Dowd conceded that debtors bear responsibility for defaulting on their loans, but added, “the amount the lenders are collecting or are attempting to collect on these types of loans shocks the conscience.”

Alicia Campbell, the borrowers’ lead lawyer in the case, asserted that lenders wait for the right timing to sue their customers, knowing that interest will continue to accrue over the course of the court proceedings.

Judge Dowd wrote that class member S.S., who took an $80 loan from plaintiff Capital Solutions Investments I, Inc., also known as Loan Express, eventually paid $5,346.4 but still had a remaining balance of $19,643.48.

“I believe Section 408.500 has through amendment and through the unregulated nature of the marketplace been gutted of its original intended purpose, which was to make these small loans more available to consumers to help them through a temporary financial difficulty,” Dowd wrote.

Dale Irwin, a consumer protection lawyer in Kansas City, said Dowd’s forceful concurrence is unique, especially in appellate rulings.

“It’s very rare to see an appellate judge putting these examples forth and condemning a law,” Irwin said. “That is extraordinary.”

Calling the ruling an “injustice,” Dowd called on the Missouri legislature to examine relevant state laws and “return them to their original purpose of allowing small loans at manageable rates to aid our fellow citizens in managing the obligations of their daily lives.”

Molly Fleming said that while lenders who fall under Section 408.500 are entitled to make a profit, high interest rates should not be imposed on communities that are financially vulnerable due to low minimum wage and lack of health care.

Morris Cornley, a veteran currently residing in Kansas City, got behind on his bills after losing his truck driving job during the 2008 financial crisis. He then had to support his father, who was on hospice care, and himself on a part-time job as a Jimmy Johns delivery person.

“I was making about $300 every two weeks plus tips,” Cornley said. “I would make around $100 in a week on tips, but that went to paying gas, car insurance, food to eat. It took up all my money just to do that.”


Morris Cornley was shot by a drive-by shooter while inside his home in Kansas City. Emergency hospital bills exacerbated Cornley’s debt and hurt his credit. (Siri Bulusu/MEDILL)

Cornley took out a $500 payday loan from Speedy Cash in Kansas City to keep from falling behind on bills, which included treatment for a gunshot wound.

“You see the commercials and the signs and it sounds easy to do,” Cornley said. “OK, $500 and you have 30 days to pay it back. What you don’t realize is you’re paying something every day.”

Cornley took out multiple payday loans from several lenders to cover his mounting debt.

“It got to the point where I couldn’t pay them,” Cornley said. “Then I found out Speedy Cash was trying to garnish my paychecks.”

Speedy Cash then went on to sue Cornley for $761.76 to cover his original loan, plus attorney and court fees. Gina Chiala, a Kansas City lawyer, took Cornley’s case pro-bono, and ultimately won.

Cornley “is a classic example of how people end up in these situations,” Chiala said. “A couple strokes of bad luck and all the sudden you’re forced into something so hard to get out of.”

Cornley recalls how Chiala justified his entering into the contract due to his meager income and hardships at the time.

“People don’t think of fast food jobs as a way of life,” Cornley said. “They don’t see how desperate it is for us at the time. People who judge us don’t know we don’t have other options.”

Cornley said he first attempted getting a bank loan in the amount of $2,000 but his poor credit, which was due in large part to bills from an emergency hospital visit, resulted in rejection.

After pawning his late wife’s jewelry, Cornley had exhausted all options thus pushing him to a payday loan. With two loans still outstanding now, he said he understands how people can judge him as making poor financial choices.

“I did sign my name and I did know it was a contract,” Cornley said. “People who judge are signing bank contracts, they don’t know how desperate we are. I tried the bank but they turned me down.”

The Pew Charitable Trusts study on payday lending found that “37 percent of borrowers have been in such desperate financial situations that they would take a payday loan on any terms offered.”

Kevin Brown of Kansas City was unemployed for 18 months after being laid off from his job in the mortgage industry in 2010.

“Honestly, I was so desperate for money I didn’t even read the contract,” Brown said. “All they asked me was do I have a checking account.”

Brown was able to pay off his first $300 loan within one month, and then returned and took out two more loans. His unemployment insurance fell through and he began falling behind on his loan payments.

“They found out where I was working and starting calling me and harassing me for money,” Brown recalled. “They were withdrawing money from my checking account but I didn’t have enough of a balance in there so I was also being charged overdraft fees.”

To prevent further penalty fees, Brown closed his checking account and his access to traditional banking.

“It’s a story I’m not proud of,” Brown said. “It’s not much different than seeing people in movies go to loan sharks, the only difference here is you don’t get beat up physically. You do get beat up emotionally and financially and that’s where the shame comes from.”

Brown only has one outstanding loan remaining and estimates the current balance to be above $700 after only four months, more than double the original amount.

“These loans, they strip you of your dignity,” Brown said. “They prey on people who are relying on them as a last resort.”

Clark was able to pay his balance off once he received his disability check from the Veterans Association, money which should be helping treat his PTSD.

“After I paid it off, any time I talked about it I did cry,” Clark said. “It made me feel how stupid it was.”

Clark is now a vocal opponent of predatory lending and has given talks around the country to appeal to legislatures to enforce interest caps on short-term loans.

“It took me a time to realize I wasn’t stupid,” Clark said. “I’m just trying to get a piece of the American Dream they say you can get if you do the right thing.”

Photo at top: Elliott Clark is currently free of debt and resides in Kansas City with his wife. (Siri Bulusu/MEDILL)