CreditCards.com

Fine print, Living with credit, Research, regulation, industry reports

Cap cash advance, payday loan interest rates, group says

Connie Prater

Maybe you’ve driven by a cash advance or payday loan franchise in your area and wondered about the people you saw coming and going. These storefront shops are a source of quick money for the cash-strapped — people with bad credit or no credit and as a result are not likely to have access to bank or credit union loans or credit cards.

Quick cash
The typical customer is working but doesn’t earn living wages — enough to support themselves and their families. Because they work, they qualify for payday loans, a lending scheme that has grown into a $28 billion a year industry. Patrons need only have a pay stub to verify employment and a checking account. They can then borrow small amounts (the average loan is $300) and sign a personal check made out to the lender and dated on their next pay day.

If the Center for Responsible Lending had its way, those payday shops would probably have to hang “Customer Beware” signs out front to keep consumers away. The North Carolina-based, nonprofit just published “Financial Quicksand,”a report worth reading if you’ve ever considered taking out a payday loan or know someone who has.

400 percent interest
Basically, the group found that these loans end up costing the typical customer 400 percent in fees and interest. (Yes, 400 percent. That’s not a typo.) A person taking out a $325 loan may pay back $793.

How is this possible? The loans must be repaid in full in two weeks (by the next pay day) and in that short period of time many people have not resolved the financial crisis that sent them scurrying for quick cash in the first place. That means they end up renewing the loan (called flipping) and racking up more fees with each renewal. Borrowers become trapped in a debt spiral.

“The process of loan flipping creates the long-term cycle we call the debt trap,” the report says.

An Ohio homeowner in foreclosure counseling told CNNMoney.com:

“You get a payday loan and you take your pay next payday and pay back the loan. Then you don’t have enough money to last to the next payday, so you go back. If you don’t pay the loan, they call everybody from your employer to your sister.”

36 percent cap
The Center for Responsible Lending is calling on all states to adopt laws that cap payday loan fees at 36 percent. The group estimates that payday and cash advance lenders rake in $4.2 billion in excessive fees from borrowers.

A spokeswoman for the Community Financial Services Association of America, a trade group that represents payday lenders, told the Associated Press that capping interest on the loans would lead to a “complete ban of the payday advance product. Banning a popular, regulated, short-term credit product is not a consumer protection.”

Working class ‘victims’
Some people have little sympathy for the ‘victims’ of payday loan traps. (See reader comments on Motley Fool’s “The flip side of payday lending“) From what I’ve seen personally, payday loan borrowers are working class, poor people, often new immigrants who may or may not speak English well and are not savvy about personal finance and managing money. They may be ill-equipped to fight or complain about predatory lending practices. They are most in need of strong consumer protection laws.

See related: “4 wrong ways to escape credit card debt

Join the Discussion

We encourage an active and insightful conversation among our users. Please help us keep our community civil and respectful. For your safety, we ask that you do not disclose confidential or personal information such as your bank account numbers, social security numbers, etc. Keep in mind that anything you post may be disclosed, published, transmitted or reused.

The editorial content on CreditCards.com is not sponsored by any bank or credit card issuer. The journalists in the editorial department are separate from the company's business operations. The comments posted below are not provided, reviewed or approved by any company mentioned in our editorial content. Additionally, any companies mentioned in the content do not assume responsibility to ensure that all posts and/or questions are answered.

  • Tony Lance

    is it legal to charge 400% interest in Ohio?

  • Unfortunately, the answer is, “it depends.”
    The two big factors are Ohio’s usury law, and where the loan originated.
    I see from a quick Google search that Ohio does have a usury law. (Usury laws traditionally set caps on interest.) I’m afraid I don’t know its details, and I’m not a lawyer, so you wouldn’t want me interpreting it. So I don’t know if a 400 percent interest loan would on its face be illegal.
    But the other factor is, where’d the loan originate? Our friendly Congress, some years ago, did the bidding of the card industry and allowed them to “export” the usury laws of their home state. States intersted in attracting the headquarters of these lenders then did away with, or crippled their usury laws. That’s why all the card issuers are headquarterd in states such as Delaware, South Dakota and Nevada, where usury laws have been repealed or shot full of holes. The lenders headquartered there can charge pretty much what they want, and charge it to anyone they want in the country, without fear of tripping over other states’ usury laws.
    I hope that helps.

  • kevin.eb

    I see from a quick Google search that Ohio does have a usury law. (Usury laws traditionally set caps on interest.) I’m afraid I don’t know its details, and I’m not a lawyer, so you wouldn’t want me interpreting it. So I don’t know if a 400 percent interest loan would on its face be illegal.
    ================================================
    kevin
    Payday Cash Advance Loan