You see them on television and in social media, and hear the advertisements on virtually every radio station. For Americans, it is very easy to find a solution to financial needs through a short-term payday advance and loan. In fact, you don’t even have to go out to secure your own payday loan; many of them are available now online.
The problem is that debt and financial management is a growing problem for single income providers and families. While getting a capital loan for the purchase of a home, car, or other asset is difficult and requires a lengthy credit check, payday loans are fast and easy to get. So much so, in fact, that many families find themselves caught in the cycle of payday advance loans and repayment fees that further complicate strained finances.
The compounding impact of fees and interest on small loans is punitive; intended to be a short-term fix for a difficult financial period of two weeks to a month, some people find themselves caught in a long-term repayment cycle that can last years, causing significant damage to their credit through non-payment or late payment habits.
It is poised to be a solution but is now a growing problem for Americans, particularly with some large payday loan organizations that have deliberately skirted consumer protection and finance laws.
Image by Nick Youngson
How Much Interest Is Charged on Payday Loans?
The amount of interest that can be charged by a temporary loan provider is typically mandated by state law. Short-term loans are convenient, easy to access in case of emergencies, and are available to individuals who may have compromised their personal credit. Frequently, the individuals who need the loans the most are some of the most at risk financially, including low income families, who can be victimized by interest rates that have been documented as high as 390 percent.
The “Truth in Lending” federal act (TILA) requires that any lender provide matter of fact reporting of the nature of the loan and the total cost of lending, including a written contract that outlines:
- The original loan amount.
- The rate of APR annual interest charged.
- The total cost of lending (interest + principal repayment amount).
- The length of your loan (days or weeks).
- Late payment charges and compound interest penalties, including insufficient fund charges.
The Federal Trade Commission (FTC) provides assistance to protect consumers, and it actively prosecutes companies that offer payday loans for deceptive advertising, fraudulent management, and predatory contracts. In recent cases, the FTC has also charged payday lending companies that establish businesses on Native American reservations, where loans and interest rates are not easily governed under federal jurisdiction.
There are 32 states that have supported payday lenders with what is referred to as “safe harbor” legislation. The laws in these states either permit lenders to charge ‘triple digit’ interest rates, placing a high cap of approximately 400 percent, or no regulated cap on interest, allowing lenders to charge whatever they wish.
States that have moved to control the interest rates for citizens who are lower income or at high-risk of being victimized by predatory loans include:
- Maryland
- Vermont
- Pennsylvania
- Connecticut
The states that protect high-interest payday lenders include: Alabama, Alaska, California, Delaware, Florida, Hawaii, Idaho, Illinois, Indiana, Iowa, Kansas, Kentucky, Louisiana, Oklahoma, Texas, Michigan, and Nevada.
What is of greatest concern for regulators in the United States is the lack of legislation for online lenders, who may not be subject to the same state laws as those who use their high-interest financial services. In fact, many national lenders are moving to an online format specifically to take advantage of the legal gray-area, and access more customers.
When Payday Loan Companies Get into Trouble
Recent payday loan class action suits have both surprised and started to reform the payday lending industry. One of the most recent high-profile and successful class action suits was brought against Advance America, what was once the largest payday lender in the United States. In 2012, the successful class action settlement of Kucan v. Advance America was awarded $18.75 million dollars and dispersed to 140,000 citizens in North Carolina who the court determined had been victimized by illegal fees, lack of lending disclosures, and interest rates.
While states may allow for high-interest loans that often put the needs of the lender last, federal legislation is rushing to catch up with the prevalence of online payday loans in an effort to stem consumer reliance on this expensive type of lending. The Consumer Financial Protection Bureau (CFPB) is new, and provides additional resources and a database of national complaints against lenders to help keep consumers informed.
The CFPB watchdog division shares that, as of 2016, it has processed more than 900,000 complaints from consumers successfully in disputes with short-term lending companies. The website also provides a number of valuable personal finance tips and tools for budgeting.