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In life, there are some great and brilliant combinations. Peanut butter and chocolate, federal holidays and drive-through ATMs. Then, there are some things that should probably NEVER come together. Want an example of that phenomenon? How about payday loans and unemployment benefits? I recently read an article in the LA Times about this trend, which is probably one of the most disastrous ideas I’ve head recently… and that’s really saying something, blogging on the American financial sector. The jobless of America are the payday loan industry’s newest revenue source, for better or for worse. Consumer advocates caution that collecting payday loans on unemployment insurance benefits is a recipe for major financial trauma, and a cycle of inescapable debt. The payday loan industry, of course, says that they are simply providing a much-needed service to those who have no other feasible way of tracking down emergency cash when needed.

Payday loan companies generally provide cash to those who need an advance on their normal paychecks. Consumers can instantly be approved for a loan lasting around two weeks (or until the next expected paycheck) for the amount of a few hundred dollars – most states have a cap of five hundred. The trade-off for this service is the fact that these loans cost a LOT of money. The minimum cost is about ten dollars per one hundred borrowed, and the highest (in states that have no payday lending laws) is around thirty per one hundred. Annualized rates of interest on these financial products are sky-high: three hundred percent and up. For that reason, these loans are extremely controversial. Most states in the country have enacted some sort of laws limiting the lending capabilities of payday lenders, usually by means of interest rate caps and prohibitions against carrying more than one loan at a time. On a federal level, Congress passed a law in 2007 that prohibited payday lenders from doing business with active members of the Armed Forces, due to studies showing that financial stress related to payday loans could affect battle preparedness.

Now, payday lenders are extending these same services to those on unemployment benefits. The LA Times story brought up the fact that a person making just three hundred dollars a week on unemployment can walk into a payday loan office and walk out with two hundred and fifty-five dollars. They’ll be charged a forty-five dollar fee for it. There’s that three hundred dollars, two weeks before the check even hits the mail. Realistically, what is a person in this position supposed to do, short of taking out ANOTHER loan as soon as possible? Many payday loan customers have multiple loans floating at any given time, or else have to immediately take out another loan after paying off the first. The typical customer of these establishment will borrow ten payday loans per year… and many will take out many more.

A payday loan is secured by a personal check. At the start of the loan, the customer writes out a personal check to the payday lender for the amount of the loan plus fees and charges, and post-dates it for the date the loan is due. At the end of the loan period, the customer can either “buy” the check back for cash, or simply allow the lender to deposit the check and collect their money. In some states, consumers have the right to “roll over” their loan a finite number of times by paying only the interest charges on the loan, buying them another two weeks or so of grace and good standing on their loan, and another amount of money in the hole.

The Center for Responsible Lending has long been an ardent foe of payday lending for years. As consumer advocates, they cling firmly to the assertion that payday loans only “give the illusion of assistance,” and actually serve to sink consumers into a worse pickle than they may have been in before.

But the payday loan industry claims that it really is just trying to help. Many of those on unemployment are unable to access traditional loan products, either because of insufficient income or poor credit. That’s to say nothing of the fact that many payday loan customers don’t need big, traditional bank loans – they simply need a micro product to help themselves get back on their feet after a period of hard times. In California, where the story originated, the unemployment rate is sitting at twelve and a half percent. Benefits range from fifty dollars to four hundred fifty dollars per week, with a new law allowing consumers to collect benefits for as long as two years. Eight Californian counties have joblessness rates of over twenty percent. The administrative net is failing to catch these people, argue the country’s payday lenders… someone has to help out. The United States’ official trade association of payday loan companies is the Community Financial Services Association, or CFSA. A representative for the Association, Steven Schlein, says that payday lenders are actually doing something for the unemployed, as opposed to the critics who would simply give these struggling individuals and families “platitudes and pats on the back.” Schlein says that the critics don’t understand the hard realities of trying to stay afloat in tough times.

Many payday lenders check income, though they are not required to. Under federal law, a customer only needs proof of identification and a valid bank account to take out a cash advance. With people receiving unemployment insurance benefits, a check stub is used as proof of income. Payday lenders say that these consumers are some of their most realizable customers. According to the CFSA’s Schlein, payday lending to the unemployed is no more or less inherently risky than doing business with those people who have actual jobs. Schleein cited an industrywide statistic that only about five percent of all payday loan customers default on their obligations, and claims that the unemployed are statistically no more likely to have a problem repaying their obligation.

While the biggest payday lenders across America do business with the unemployed in the same fashion as normal customers, it’s interesting to note that many independent lenders will not. No job, no loan – their argument is that these benefits can be cut off at any time, leaving customers unable to repay their loans as promised.