Everything You Need To Know Before Taking Out A Payday Loan or Title Loan

What is a Payday Loan?

While the definition of a payday loan can vary between different states, it is typically a small, short-term loan with significantly higher interest than other loans.

Loans requiring repayment within 30 days or having an effective APR above 30% are considered payday loans.

Payday loans vary in size from $50 to $1,000, with the average loan size being between $300 and $400. Finance charges, which are subject to legal limits in many states, typically range from about $10 to $20 per $100 borrowed. For a two-week loan, these fees translate into APRs ranging from 260 to 640 percent.

A study by the U.S. FDIC found that most borrowers use payday loans to cover ordinary living expenses over the course of months, not as suggested by the payday industry for unexpected emergencies and other one-time expenses over the course of weeks.

The payday loan industry generally operates through storefronts which provide short-term loans and other alternative financial services including check cashing, pawn loans, money transfers, bill payments, and money orders. The majority of these stores are owned by small, independent operators, while the ten largest firms together account for less than 40% of all payday lending locations.

What Are the Differences Between Payday and Title Loans and Other Loans?

Image by Jason Comely available via Flickr under CCA 2.0

The term “payday loan” originally applied to loans with due dates tied to a borrower’s next pay check, although now it encompasses most high-cost, small dollar loans. These loans are also sometimes referred to as “cash advances.”

The term “title loan” is sometimes used interchangeably with “payday loan”, in which borrowers use their vehicle title as collateral (something to be forfeited if the loan is defaulted). If the borrower defaults on a title loan, the lender may repossess the vehicle and sell it to repay the outstanding debt. Like payday loans, title loans tend to carry high interest rates, require full repayment within a matter of weeks, and usually do not take a borrower’s credit score into consideration.

The interest rate of a typical, long-term loan has an APR below 30%, while payday and title loans often have effective APRs above 400%. This means that someone who takes out a $100 loan would have to repay $400 in interest over the course of a year, in addition to the original $100.

Where are Payday Loans Allowed?

There are two important factors that determine where storefront payday lenders operate, the first being the strength of state consumer protection laws.

Payday loans are legal in 31 states, and 3 others allow for other forms of high-interest storefront lending. The remaining 16 and the District of Columbia either forbid the high interest rates that payday lenders charge or maintain stronger consumer protection laws, but still allow high-fee check cashing services. To learn the legal status of payday loans in your state, visit the Consumer Federation of America’s website for payday loan information.

In some states that permit payday lending with regulations, the loan’s fees and interest rate are capped, typically at around 36% effective APR. In other states such as Texas, Utah, Ohio, and Nevada, the effective APR for storefront loans is generally above 600%.

The second factor payday lenders consider in deciding where to operate is a region’s demographics. Studies have shown that payday lenders highly concentrate in states with a higher percentage of African-Americans, such as Alabama, Louisiana, Mississippi, Oklahoma, and South Carolina. Other studies generally found that alternative financial service providers are 21 times more likely to locate in areas where the population is disproportionately African-American or lacks a high school diploma.

Some of the largest payday lending chains across the United States are:

• ACE Cash Express
• Advance America
• Check ‘n Go
• Check Into Cash
• Fast Payday Loans, Inc.
• Money Mart
• PLS Check Cashing Store
• TitleMax Title Loans

What about Online Payday Loans?

Some payday lenders have begun to provide loans over the internet exclusively or in addition to their stores. However, to offer high-interest loans online in states where they would typically be usurious, certain companies have used native american tribe members to register their business address on sovereign land. However, this practice which has been described as “rent-a-tribe,” is being investigated for circumventing consumer protection laws.

What Should I Watch Out for with Payday Lenders?

Before you consider taking out a payday or title loan, there are some common unsavory practices you should watch out for in the industry as a whole.

Bait-and-switch tactics

• Payday lenders may misrepresent the true cost of borrowing to their customers, including misleading borrowers by failing to accurately describe the loan’s terms and conditions
• Malicious advertising, deemphasizing or completely hiding their APR in ads.
• Charging customers unadvertised, hidden fees

Abusive or unfair lending practices

• Charging excessively high interest rates and fees
• Unjustified risk-based pricing: charging more to borrowers deemed to pose a greater credit risk
• Failure to present the loan price as negotiable or otherwise taking advantage of unsophisticated borrowers

Aggressive collection practices

In most cases, borrowers write a post-dated check for the loan amount that the lender can cash on the due date if the debt is not already repaid. Since customers borrow money because they don’t have any, the lender accepts the check usually knowing that it would bounce on the check’s date. When that occurs, the lender sues the borrower for writing a bad check, which can carry additional penalties given the borrower’s intent.

If a borrower defaults, the lender may refer the debt to a collection agency, or bundle and sell it in securities. Many customers report being harassed by their lenders with threatening phone calls and emails.

Preying on low-income communities and soldiers

Families that are unbanked are more likely to use payday loans than those that have access to more secure forms of credit. Since payday lenders charge higher interest rates than traditional banks, they have the effect of depleting the assets of low-income communities.

The payday lending industry has also been accused of preying on enlisted military personnel, with storefront lenders popping up close to military bases across the country. According to the CFPB, over one in five active service members has taken out a payday loan within the last year, or three times more likely than civilians to have taken out a payday loan. Enlisted military personnel have also reported threats by lenders to report their unpaid debts to their commanding officers.

Terminology

To understand the payday lending industry, you will need to be familiar with these terms:

• Usury: the illegal action or practice of lending money at unreasonably high rates of interest.
• Annual Percentage Rate (APR): The Annual Percentage Rate is the interest rate for a whole year (annualized) on a loan, taking compounding interest into account. The effective APR is the annualized compound interest rate plus any fees. Because lenders are required by law to disclose the “cost” of borrowing in some standardized way, the effective APR is widely used.
• Vehicle title: a legal certificate of ownership establishing a person or business as the legal operator of a car. May be used as collateral for a title loan.
• Unbanked: those not served by a bank or similar financial institution
• Post-dated check: check with a date in the future, before which it cannot be cashed
• Debt rollover: occurs when the borrower extends the length of their loan, while paying a fee and accruing interest. For lenders who want to keep their borrowers perpetually in debt, they will take on customers who are likely to renew the loan multiple times, resulting in interest payments that can quickly outpace the original sum of money borrowed.
• Lien: a right to keep possession of property belonging to another person until a debt owed by that person is discharged.
• Subprime lending: the practice of lending to borrowers with low credit ratings. Because these borrowers carry relatively high default risks, subprime loans carry above-average interest rates.

Have you been taken advantage of by a payday lender?

If you’ve been tricked by payday lenders into signing contracts that weren’t fully explained, we want to hear from you.

FairShake helps people access an independent legal process to bring companies to justice. Start by sharing your complaint with us.