updated 2/22/2007 11:23:22 AM ET 2007-02-22T16:23:22

Under pressure from lawmakers and consumer groups, the payday lending industry on Wednesday announced changes to educate borrowers and help customers who have trouble making payments on short-term loans.

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Consumer advocates called the move a public relations gimmick aimed at discouraging state legislatures and Congress from limiting the annual interest rates on payday loans, which can exceed 400 percent.

Payday lenders offer quick cash advances — for a fee — that customers must repay once they receive their next paycheck. Borrowers who cannot repay the loan by the next payday often "roll over" the loan repeatedly, leading to more charges that can quickly add up and lead to a cycle of debt.

"We've heard the concerns raised about our industry by policy makers and customers and by responsible consumer groups," said Darrin Andersen, president of the Community Financial Services Association of America, a trade association that represents about half the payday lending stores.

The biggest change would give customers more time to pay back a loan with no financial penalty. This "extended payment plan" would be available at least once a year and provide borrowers between two and four extra months to pay off loans.

Other changes include a $10 million national ad campaign warning that payday loans are not a long-term financial solution and a ban on ads that promote payday advances for "frivolous purposes" like vacations.

Consumer watchdogs remained skeptical.

"This does not solve the problem of triple-digit interest rate payday lending that traps borrowers and leads to repeat borrowing," said Jean Ann Fox, consumer protection director for the Consumer Federation of America.

Fox said the extended payment plan does not lower the cost of loans or make loan repayment any more affordable. She accused the industry of trying to shift attention away from the high loan rates to distract lawmakers from enacting meaningful reform.

The industry is trying to stay one step ahead of those who want to restrict payday lending practices. At least 12 states prohibit triple-digit rates on payday loans, a cap that effectively bans payday lending, according to the Consumer Federation of America. Dozens of other states are also considering legislation to crack down on payday lenders.

Last year, Congress imposed a 36 percent annual percentage rate cap on payday loans to military service members after reports showed thousands of troops in debt to payday lenders, many of which are clustered outside bases.

Anderson, who is president of QC Holdings, Inc., an Overland Park, Kan., payday lender, said only a small percentage of customers have trouble repaying loans.

The nonprofit Center for Responsible Lending estimates more than 90 percent of payday loans go to repeat borrowers. Customers are drawn to the lenders because, unlike banks and credit unions, they don't run credit checks.

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