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A small, fragile woman with close cropped gray hair, Gloria Olivera, 65, quietly waits in line behind the bullet-proof glass at the check exchange on San Pablo and University avenues. Like the majority of check-exchange customers today, however, she is not there to cash a check. She’s there to get a loan.  

“My friends tell me, ‘Stay away! They’re stealing you’re money!’” she says. A cancer patient and retired teacher’s aid, she lives on $700 a month in Social Security. She has come to the exchange to get a $50 advance, or “payday loan,” on her Social Security check, so she can buy her medication, she said.  

Payday loans are small, short-term loans with annual interest rates of more than 400 percent. Prohibited in 19 states, in California they have been around since 1997 and have increasingly become a last resort economic resource for many of the state’s poor. 

Payday loans function as the simplest kind of loan. Customers must have a bank account and write checks for up to $300. The check exchange then loans the customer the money, deducting $15 for every $100 lent. After two weeks, the customer must repay the loan, or the exchange will deposit the check.  

“That averages out to be about a 450 percent annual interest rate,” said Berkeley Public Policy professor Steve Raphael. “The worst of the credit cards are lending for 20 to 25 percent.” 

Raphael sees payday loans as “a huge tax. It’s 20 percent of your take-home after taxes are deducted. It’s an incredible amount to pay,” he explains, “just to get your pay check two weeks earlier Pam Douglas first used the service in December “to cover some emergency expenses.” Since then, however, she has been unable to pay off the original loan and has had to take out an additional loan every two weeks to keep her bank account from dropping below zero. 

“I can’t seem to get myself out of the hole,” Douglas says. 

Payday loans were introduced in California in 1997 after fierce lobbying on behalf of the California Financial Service Providers Association, which represents 1,200 of the states 3,000 check exchanges. “One of the reasons we sought this legislation,” says Association president Jim Ball, “is because we knew our check cashing revenue would decline due to cuts in welfare and increasing reliance on direct deposit.” 

Both sharply reduced the numbers of checks being cashed. To head off the losses, the industry pushed for and won California state legislation, legalizing payday loans.  

The move proved very lucrative for the 2,000 check exchanges in California which provide the service. Previous to 1997, check cashing provided for the majority of industry revenues. Today it has shrunk to as low as 25 percent. Payroll advances in large part have taken up the slack. 

“We’ve seen a phenomenal growth in the product,” said Ball.  

Consumer groups including CalPRIG, the American Association of Retired Persons (AARP), and Consumer’s Union, as well as legislators such as Oakland California State Senator Don Perata, meanwhile are organizing to put an end to what they see as exploitation of lower income people, who have little access to other means of credit.  

Unlike other forms of credit, such as credit cards, there are no payment plans available to consumers of payday loans. “If you can’t pay off the loan entirely at the end of two weeks, it flips over and you have to take out another loan,” says AARP’s Lupe de la Cruz. “The product is fundamentally flawed. It is designed to keep you in debt.” 

According to AARP research, the average income of people who take out these loans is $15,000. “These are products are targeting people living on fixed incomes”- retired people on social security, welfare recipients, or surprisingly, military personnel..” A 2000 AARP survey found that the highest concentration of payday lenders is around military bases. 

For the past three years, Senator Don Perata has attempted to reform payday loans through legislation, co-sponsored by the AARP and Consumer’s Union, which would set up payment plans to allow consumer’s to pay off their debt over a three month period.  

“But,” says Perata Chief of Staff Erin Niemela “We’ve faced serious opposition. Check casher’s are fighting it across the board.”