It seemed like a smart move. In order to pay her bills on time, and avoid late payment fees, Kim Walsilewski, a 39-year old single mother, took out a payday loan.

The plan backfired. Unable to pay back the loan with its steep interest charges, she arrived home one evening only to be handed a court summons on her front doorstep. Her payday lender was suing her for repayment of her $2,800 loan.

“Right now my credit is destroyed,” she explained.

If you’re facing desperate times, a payday loan like seems like the answer to your financial prayers. Essentially, you borrow against your future paycheck at an exorbitant interest rate.

According to the Federal Deposit Insurance Corporation (FDIC), payday loans are smaller-dollar, short-term, unsecured loans that borrowers promise to repay in full out of their next paycheck or regular income payment. They are usually priced at a fixed-dollar fee, which represents the finance charge to the borrower. Because they have short terms of maturity, the cost of borrowing is expressed as an annual percentage rate, and ranges from 300 to 1,000 percent.

But buyers beware: You could end up in bankruptcy court with ruined credit trying to pay this loan back.

Like thousands of other consumers, Walsilewski got caught in the payday loan trap. She complicated the situation by borrowing an additional $1,000 to help her catch up on her mortgage payment. It got to the point where half of her paycheck went to the payday lender. She paid over $6,000 in interest on her loan at an interest rate of 600 percent.

“It’s in the paperwork, but it isn’t visible, it’s buried in the bylines,” said Wasilewski. “You don’t know that you are going to pay such a high finance charge and they certainly don’t tell you.”

To help consumers understand how payday loans actually work, the Consumer Federation of America (CFA), an advocacy group based in Washington D.C. unveiled a new educational site early this month. The site,, was designed to inform consumers about the hazards of taking out a quick fix loan.

“Consumers are paying an annual interest rate of 400 percent or more on these loans,” said Jean Ann Fox, director of consumer protection at the Consumer Federation of America.

“The fees for a bounced check don’t normally equal 400 percent,” she added. Most banks charge less than $50 for a bounced check.

According to a recent study by the Monsignor John Egan Campaign for Payday Loan Reform, a consumer advocacy group based in Illinois, two-thirds of the customers sued by payday lenders are women.

“One of the top five reasons why people use payday loans is to pay for groceries,” said Fox, who said she was shocked by the number. “At least with the right information in hand, they (consumers) can weigh their options.” explains the nuts and bolts of how a payday loan works by providing a calculator that estimates the true cost of a payday loan. Consumers enter the dollars borrowed against the fees charged, and the number of loan renewals used during a year.

While payday lenders call the interest charged on these loans “finance charges” or “one-time fees” the annual percentage rate for payday loans in Illinois is currently running about 600 percent.

Consumer advocates such as the Chicago Action Committee/Illinois aren’t shy about their aversion to payday loans. But they feel that the best way to keep consumers from being ripped off by payday lenders is to have mainstream financial institutions offer them to their customers.

Julie Sampson, legislative director for the action committee believes that consumers would be better served if this type of loan was handled by mainstream state-chartered banks that are more tightly regulated under state law, especially when it comes to determining annual percentage rates (APRs).

“At least there would be some form of regulation in place to assure that this type of thing doesn’t happen to consumers,” Sampson said. “We simply want what is fair to the consumer.”

Until recently, payday lenders could issue an unlimited number of loans to a consumer. Last spring Illinois legislators passed a law that allowed consumers to take out only two loans at a time. The Consumer Federation of America believes that this practice should be stopped as well.

“Until there is proper reform of this industry, having one loan with a payday loan vendor is one too many,” said Fox.

By giving consumers more information and tools to help them understand the damaging nature of payday loans, Fox hopes fewer consumers will turn to them in times of financial crisis.

May 22, 2006.