With bills mounting, mechanic Norman Jacko reluctantly turned to a payday lender for relief.

"If I had a choice, I wouldn't do it," the 50-year-old said, as he signed off on a second loan in as many weeks. "The job right now is just not cutting the mustard. You gotta do what you gotta do."

Jacko makes $30,000 a year, about half what he used to in a previous job that went south. He said he expects to pay about $100 plus interest for borrowing $400.

"I'm just barely getting along paycheck to paycheck, which sucks," he said.

Payday lending is a lucrative and growing industry, which, this year, is expected to generate $7 billion in fees off of $49 billion in loans, according to Packaged Facts, a division of MarketResearch.com. That's up from $20 billion in 2002.

An estimated 5 percent of Americans have taken out payday loans. For people like Jacko, payday lenders are seen as a source of quick cash that can help in times of financial emergency.

But the cost can be steep.

In Houston, lenders charge about 9.9 percent interest and at least $20 for every $100 borrowed, according to an informal poll of several lenders. If the loan can't be paid within two weeks, fees and interest roll over. The annual percentage rate can exceed 1,100 percent.

Though they may be a godsend for those in need, some say the payday lending industry is set up to prey on low-income and minority borrowers.

"What drives this industry is amazing greed," said Texas Sen. Eliot Shapleigh, D-El Paso, who introduced a handful of bills during the last legislative session that would, among other things, limit the interest rate lenders can charge to 36 percent annually.

The industry says it is providing a service that is needed and that it doesn't deserve the hits it's taking from critics.

"We believe that our product is good for every middle-American who finds themselves in need of short-term money," said Jamie Fulmer, spokesman for Spartanburg, S.C.-based Advance America, the nation's largest cash advance provider.

Payday lenders also say criticism that they prey on low-income and minority borrowers by concentrating their operations in poor neighborhoods is unfair.

"That's unequivocally untrue. Less than 50 percent of our customers are minorities," said Mary Jackson, senior vice president of government and public affairs for Fort Worth-based Cash America International. "There is a prevailing thought process that our consumers are poor and downtrodden."

'Well-traveled areas'

"We locate stores in well-traveled areas, where middle-class people live," said Steven Schlein, spokesman for the Community Financial Services Association of America, a trade group representing 60 percent of the nation's payday lenders.

Jacko, who's African-American, said minorities often need to turn to such lenders, but he added he doesn't believe the lenders prey on minorities.

"We make less money than most people, so,therefore, you're going to see more of us here," said Jacko, who didn't ask for a short-term loan from his bank because he has not banked there long.

Though Shapleigh's bills didn't pass in Texas, across the nation, governments and courts have tightened restrictions on payday lenders.

In Texas, payday lenders have operated since 2005 as credit service organizations, which means they must register with the secretary of state and make loans through Texas-based consumer lending companies.

Logging complaints

"We don't regulate them but take complaints," said Steven O'Shields, director of administration for the Austin-based office.

Critics said payday lenders have long existed in some form. But they began to grow in the 1980s after the deregulation of the banking industry. That's when banks moved away from making small loans, and more payday lenders began to step in to fill the void.

"No one else was servicing this market," Schlein said. "There's an absolute need for this kind of short-term credit."

Downtown worker Crystal Medellin recently took a $200 cash advance on her paycheck, something she has done several times in the past year.

"I had to help my mom with some bills she had because she wasn't working," said Medellin, 22. "They're good when you need extra cash."

Filling that need helped several publicly traded payday lenders who operate in the Houston area to report double-digit growth in earnings for the second quarter of the year.

Advance America, for example, which operates nearly 100 locations in the Houston area, reported second-quarter revenue of $173.9 million, up 11.6 percent for the three-month period.

And Cash America International reported 121 percent growth in cash advance fees during its second quarter.

The company, which operates 44 pawn shops in Houston that offer payday advances and 15 Payday Advance stores, reported revenue for its payday lending and pawn shop business increased 43 percent to $213.9 million during the three-month period.

Despite such healthy earnings, these lenders do not always make extraordinary profits because of operating costs, according to Aaron Huckstep, author of Payday Lending: Do Outrageous Prices Necessarily Mean Outrageous Profits?, which ran this year in the Fordham Journal of Corporate & Financial Law.

"In fact, when compared to many other well-known lending institutions, payday lenders may fall far short in terms of profitability," Huckstep wrote.

Best choice for some

"In the end, choosing a payday loan may be the most convenient and cost-effective alternative for some people," he wrote.

Consumer advocates encourage cash-strapped consumers to seek other outlets for small loans, including relatives, credit unions and banks.

Some banks are starting to offer short-term loans as well. Wells Fargo allows customers to borrow up to half of their monthly direct deposit income, or a maximum of $500, whichever is less, before their next direct deposit for a finance charge of $2 for every $20 borrowed.

One company, Oasis Bank, which opened in May on Wayside, is catering to Hispanic customers who don't have bank accounts or are using payday lenders to get through tough times.

The company doesn't charge fees for every $100 borrowed, as is common practice for payday lenders. And it offers loans of $5,000 or less to employed borrowers for interest rates of about 9.7 percent, depending on criteria such as their credit history.

The bank plans to offer more branches in areas populated by Hispanics and payday lenders.

jenalia.moreno@chron.com