More in middle class using payday lenders

With its quaint downtown and tree-lined streets, the unpretentious city of Cleveland, Tenn., in the foothills of the Great Smoky Mountains seems an unlikely epicenter for a $50-billion-a-year financial industry.

But this is where W. Allan Jones founded Check Into Cash, the granddaddy of modern payday lenders, which cater to millions of financially strapped working people with short-term loans -- at annualized interest rates of 459%.

"It's the craziest business," said Jones, 55, a genial homegrown tycoon who founded his privately held company in 1993. "Consumers love us, but consumer groups hate us."

In years past, a worker might have asked his employer for an advance on his paycheck. Now, with a driver's license, a pay stub and a checking account, he can walk into a typical payday loan store, postdate a check for $300 and stroll out with $255 in cash after a $45 fee.

No muss, no fuss, no credit check.

Americans now pay as much as $8 billion a year to borrow at least $50 billion from payday lenders, by various estimates.

That's more than 10 times the level of a decade ago, according to a report by the California Department of Corporations. In California alone, customers now borrow about $2.5 billion a year from payday lenders, the report said.

Nationwide, the number of payday outlets has exploded from zero in 1990 to some 25,000 today, running the gamut from mom-and-pop outfits to national chains

Advocacy groups have long bashed payday loans as debt traps for the working poor, accusing lenders of baiting their customers with easy cash -- and then hooking them into an endless cycle of repeat borrowing.

As the economy has worsened, however, payday loans have increasingly become crutches for those higher up the economic scale, said Elizabeth Warren, a Harvard law professor who chairs a congressional watchdog panel on the $700-billion bailout for the financial system.

More and more middle-class families use the loans "to put off the day of reckoning," she said: "Too many families live with no cushion, so when something goes wrong they turn to payday lenders."

Payday loans aren't available only on payday. The term derives from the fact that they are designed to help borrowers get from one paycheck to the next, usually about two weeks.

Sheryl Loebig is a single mother of four who works as a paralegal for the nonprofit Legal Aid Society of Orange County.