Many people with bad credit feel they have no other choice than to get a payday loan when in a bind. If you think payday loans are small time, think again. There are more than 20,000 payday lending storefronts in the U.S. (In comparison, there are about 14,000 McDonald’s restaurants in the U.S.)
Astronomical interest rates, predatory lenders, and unsuspecting people forever in debt: That’s generally what comes to mind when people think of payday loans. Well, the reality isn’t so simple. A payday loan is a short-term cash loan secured by a personal check.
Say you need a short-term loan to cover some unexpected expense. You may not have access to credit lines or cards. Your bank won’t give you a short-term loan. So you go to your local payday lender. You write a personal check for the amount you want to borrow, plus a fee, and you receive cash.
Your check is held for future deposit or electronic access to your bank account, usually on the date of your next payday, hence the term payday loan and the short period of the loan (usually one or two weeks).
Payday loans charge extremely high fees: Using a not-atypical $17.50 for every $100 borrowed up to a maximum of $300, the interest rates run 911 percent for a one-week loan, 456 percent for a two-week loan, and 212 percent for a one-month loan.
These loans are small in dollars and high in transaction costs. Many banks find them unprofitable and won’t make them. The result is the payday loan industry. As expensive as these loans are, they can be less expensive than overdraft charges on your bank account, which are now limited by law but used to be so steep and unfairly applied that payday loans were cheap by comparison.
Payday lenders claim that their loans aren’t high-cost if they’re used properly. Here’s an example of their thinking: You take a taxi for short distances and a plane for long ones. You wouldn’t take a taxi from coast to coast, nor would you take a plane to the local grocery store.
Just because the taxi’s rate per mile is higher than the plane’s cost per mile doesn’t necessarily mean that the taxi is overcharging for its service. Unless, of course, the taxi takes you from Times Square to Lincoln Center via Los Angeles.
The rules of payday loans
Lenders are required to quote the cost of a payday loan as both the dollar finance charge and the annual percentage rate (APR). In addition, many states have rules and limits for payday lenders. Find out your state’s rules.
Here are the rules for the five largest states:
California allows loans of 31 days of up to $300. Fees allowed are up to 15 percent of the amount loaned. The APR for a $100 loan for 14 days is 459 percent.
Florida allows loans of not less than 7 or more than 31 days of up to $500, exclusive of fees. Fees allowed are up to 10 percent of the loan plus a verification fee. The APR for a 14-day, $100 loan is 419 percent.
Illinois allows loans of 13 to 120 days of up to the lesser of $1,000 or 25 percent of the borrower’s gross monthly income. Fees allowed are $15.50 per $100 loaned. The APR for a 14-day, $100 loan is 403 percent.
New York prohibits foreign banking corporations from issuing payday loans. It also has a 25 percent interest rate cap on loans. Payday loans are effectively illegal in New York: It is a violation of state law to make payday loans in person, by telephone, or over the Internet. It is also illegal for a debt collector to collect, or attempt to collect, on a payday loan in New York.
Texas allows loans of 7 to 31 days without limitation. Fees allowed vary according to a chart contained in state legislation. The effective APR for a 14-day, $100 loan is 309 percent.
On the federal level, the Department of Defense provides protections for men and women in the armed forces and their families. Specifically, lenders may not charge more than 36 percent annual interest, including most fees. Instead of payday loans, military personnel may get financial assistance from military aid societies, such as the Army Emergency Relief, Navy and Marine Corps Relief Society, Air Force Aid Society, or Coast Guard Mutual Aid.
If you’re in the Navy or the Marine Corps, the Navy and Marine Corps Relief Society will pay off your payday loan if you’re having trouble repaying it, and then you can pay back the relief organization on better terms.
How to get help if a lender violates the rules
If you think that a payday loan lender has taken advantage of you, you have a couple places to turn:
Your state’s lender regulation agency: Regulators may be able to help you work out a payment arrangement with a lender. And if you live in a state that doesn’t allow payday lending, the state regulator can take action against a lender. Go to Consumerfinance.gov to find a link that helps you find the right agency.
The Community Financial Services Association of America (CFSA): More than half of payday lenders are members of the CFSA, an organization that requires its members to subscribe to a code of conduct that goes beyond state laws. You may complain to the CFSA if you feel you’ve been treated unfairly or abused.
Under its code of conduct, you can request and receive an extended payment plan that allows you to extend your loan for four payday cycles without any additional fees or charges.
Many nonmember payday lenders don’t offer payment plans. Their idea of a payment plan is a loan rollover until you collapse under the weight of the fees and cumulative interest charges.