Payday Loans: Modern Day Loan Sharks?
The ads are on the radio, television, the Internet, even in the mail. They refer to payday loans, cash advance loans, check advance loans, post-dated check loans, or deferred deposit loans. These small, short-term, high-rate loans by check cashers, finance companies and others all come at a very high price for consumers.
Here’s how they work: A consumer writes a personal check payable to a payday lender for the amount the person wants to borrow, plus a fee charged by the payday loan company simply for making the loan in the first place. The payday loan company gives the consumer the amount of the check less the fee, and agrees to hold the check until the loan is due, usually the next payday. The fees on these types of short-term loans can be a percentage of the face value of the check — or they can be based on increments of money borrowed. For example, a flat fee or a different fee for every $50 or $100 borrowed. The borrower is charged new fees each time the same loan is extended or “rolled over.”
The problem with payday loans is that the consumer-borrower is charged extremely high interest rates on the loan, usually 25% per month, plus fees, which typically equals an annual percentage rate of at least 300%. Thus, a payday loan is the most expensive loan allowed by law. How expensive? For example, say you need to borrow $100 for two weeks. You write a personal check for $115, with $15 being the fee to borrow the money. The payday lender agrees to hold your check until your next payday. When that day comes around, either the lender deposits the check and you redeem it by paying the $115 in cash, or you roll-over the loan and are charged $15 more to extend the financing for 14 more days. If you agree to electronic payments instead of a check, the payday loan company would debit the full amount of the loan from your checking account electronically, or extend the loan for an additional $15. In this scenario, the cost of the initial $100 loan is a $15 finance charge and an annual percentage rate of 391%.
The fact that this type of loan is even legal can be traced to a United States Supreme Court case, Marquette National Bank v. First of Omaha Service Corp., decided in 1978, which essentially overturned a federal cap on the amount of interest that can be charged on a credit card loan. Each State’s mandated cap on interest rates, usually 9%, were eliminated and replaced with no effective caps on what national banks could charge for credit card and other loans. Indeed, for thousands of years usurious loans have been deemed illegal in some form in every civilization from the time of the Babylonian Empire to the end of Jimmy Carter’s term. We always had laws capping the amount of interest which could be charged on a loan. The reason for a cap on interest rates is a very important one: it eliminates the possibility that the poor and disadvantaged will be poor and disadvantaged for their rest of their lives (as it would take practically their entire lives to pay off loans with extremely high interest rates), and it assures that money is funneled into productive enterprises, like manufacturing. Recently, Harper’s magazine, in its April, 2009 issue, had a cover story regarding the lifting of the cap on loan interest in the United States, and argues convincingly that it is one of the reasons – maybe the most important reason – why we are know suffering the greatest economic downturn since the Great Depression.
Importantly, there is some legal protection for consumers from these modern day loan sharks: the federal Truth in Lending Act (“TILA”). TILA treats payday loans like other types of credit in that the lenders must disclose the cost of the loan. If they don’t, they would be in violation of the Act, and can be sued for actual damages, statutory damages and attorneys’ fees. TILA protects consumers from predatory payday loan companies by mandating that payday lenders must give you -- the consumer/borrower -- important information about the loan you are obtaining. According to TILA, payday loan companies must provide borrowers prior to approving the loan the following:
1. The finance charge (a dollar amount) in writing; and
2. The annual percentage rate (APR — the cost of credit on a yearly basis) in writing before you sign for the loan. The APR is based on several things, including the amount you borrow, the interest rate and credit costs you’re being charged, and the length of your loan.
Before you decide to take out a payday loan, consider some alternatives. The Federal Trade Commission (“FTC”) suggests the following:
- Consider a small loan from your credit union or a small loan company. Some banks may offer short-term loans for small amounts at competitive rates. A local community-based organization may make small business loans to people;
- Shop for the credit offer with the lowest cost. Compare the APR and the finance charge, which includes loan fees, interest and other credit costs;
- Keep in mind that military personnel have special protections against usurious fees or rates charged by Payday lenders, and all consumers in some states and the District of Columbia have some protections dealing with limits on rates;
- Contact your creditors or loan servicer as quickly as possible if you are having trouble with your payments, and ask for more time;
- Contact your local consumer credit counseling service if you need help working out a debt repayment plan with creditors or developing a budget. Non-profit groups in every state offer credit guidance to consumers for no or low cost; and
- Find out if you have — or if your bank will offer you — overdraft protection on your checking account. If you are using most or all the funds in your account regularly and you make a mistake in your account records, overdraft protection can help protect you from further credit problems.
The bottom line on payday loans: Try to find an alternative. But if you must use one, make sure that all the loan terms are disclosed as required by TILA.
If you believe that a payday loan company has loaned you money without first informing you of the cost of the loan and other details as required by TILA, please contact us to discuss your legal options.