Payday loan or cash advances, one of the most popular forms of short-term lending is growing immensely popular across the United States. It is legal and regulated in 37 states across the country. Most people borrow money for short-term requirements and the amount to be paid back is deduced from their next paycheck. One needs to offer minimal documentation in the form of salary or account information and having consistent flow of income to get the loan approved.
The flip side of payday loans is the high amount of interest rates and fees. The finance charges are usually in the range of 15 to 30 percent of the amount for two week period, which is equivalent to 390 to 780 percent APR (Annual Percentage Rate). Though payday loans are not really banned in the other 13 states of US, they are termed ‘illegal’ and not feasible according to state laws. These 13 states are Arizona, Arkansas, Connecticut, Georgia, Maine, Mainland, Massachusetts, New Hampshire, New Jersey, New York, North Carolina, Pennsylvania, Vermont and West Virginia.
The laws prohibit payday lending in the form of usury limits, which means that they are not allowed to levy high interest rates other than the limits set by the state. Since October 1 2007, a federal law was also instituted capped lending to military personnel at a maximum of 36 percent APR as stated by the Secretary of Defense.
Some payday loan lenders are also getting around usury laws in some states by forging relationship with nationally chartered banks based in a different state with no usury limits. Further, some of these lenders are also using threatening means to impose fear in the minds of the consumer by saying that non-payment can result in arrests and lawsuits. Even if they do not ask for credit check, they ask for confidential account information or ask for advance fees before the loan is lent. Some lenders have sought immunity from legal action saying that they are affiliated with North American tribes. The Federal Trade Commission (FTC) is bringing in a lot of consumer awareness on these points and are also putting pressure on the courts that stringent punishment and abolishing of licenses should be done on businesses that are working against Truth in Lending Act and using unethical business procedures.
At the end of the day, it boils down to self discipline and personal budgeting. In 69 percent of the cases for first-time borrowers, it has been seen that payday loans are not really required for crisis; they are taken for urgent necessities. The fact that the borrower just needs to have a checking account and regular salary or income flow is tempting enough for many to take the plunge because money is available in just about 24 to 48 hours. For instance, the fee for a $100 loan is $15 but if the amount is rolled over for 3 times, the finance charge moves to $65. On an average, it has been seen that payday loans are paid in 18 days, which is more than two weeks, leading to higher financial charges.
The FTC says it is the duty of the consumer to ensure that he or she reads the disclosure agreement carefully. At the same time, the consumerist organization ensures that the payday loan companies abide by the state norms and laws. You can also check the ftv.gov website or contact them at1-877-FTC-HELP (1-877-382-4357); TTY: 1-866-653-4261 if you wish to report about any malpractice followed by a company or business organization that goes against consumer interests.