Payday Loans

The payday lending business model relies on trapping consumers on an perpetual debt treadmill.  The typical borrower pays back $793 for a $325 loan, and APRs on two-week payday loans range from 390% – 780%.

Fortunately, more and more states are protecting their residents from this usurious practice.  In 2008, New Hampshire, Ohio and Arizona joined twelve other states that had previously outlawed high-cost payday lending.  All fifteen states are listed below.

Members of the military are protected from payday lending because it is illegal to lend to them at higher than 36% interest.  A national usury cap of 36% would protect the entire nation from payday lending, as well as other abusive small loans such as car title loans and Refund Anticipation Loans.

The Consumer Federation of America has put together this website about alternatives to high-cost lending.

• Facts and Stats

• How Payday Loans Work

• Payday Loan Abuses

• Which States Ban Payday Lending

• Laws and Regulations: What’s Needed

• Sources for More Information

Payday Loan Facts and Stats

• Payday loans cost consumers over $4.2 billion in predatory fees each year.

• The typical payday borrower pays back $793 for a $325 loan.

• Ninety percent of the payday industry’s revenues come from consumers who get five or more loans in a year.

• For two-week payday loans, finance charges result in interest rates from 390% to 780% APR.  The first APR is for a fee of $15 per $100 borrowed, the second APR results from a fee of $30 per $100 borrowed.

• The fifteen states (and DC) which have banned payday lending, are saving their residents a total of $1.8  billion per year in predatory payday loan fees.

• There are more payday stores in the United States than McDonalds restaurants.  At the start of start of 2008, industry analysts claimed that about 23,600 payday storefronts in operation.

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How do payday loans work?

To obtain a payday loan, a borrower writes a post-dated check or authorizes the  lender to make an electronic withdrawal from his or her bank account on that date.  The check (or authorized withdrawal) is for the amount of the loan, plus the lenders fees.

Assuming a relatively low fee of $15 per $100 borrowed, a consumer borrowing $500, would write a check to the payday lender for $575.  He or she would then receive $500 in cash, and if all goes well, the lender would cash the check in two weeks.  In this example, the annual percentage rate (APR) for the loan is 390%.

But very often things don't go as the borrower hopes, and at the end of two weeks there is often not enough money in his or her checking account to repay the loan.  What usually happens then is that the borrower  extends the loan for another two weeks by paying another $75.  This called "flipping" or "rolling over" the loan. Payday lenders make most of their money from borrowers who roll over their loans in this way.  If the borrower doesn’t roll the loan over, the lenders cashes the check (or electronically withdraws the funds).  If there isn't enough money in the account, then the check will bounce and both the bank and the payday lender will charge additional fees.

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Payday Loan Abuses

• Rollovers:  The average borrower pays a fee of $18 per $100 borrowed, borrows $325, and rolls over the loan eight times before finally paying it off.  This average borrower will end up paying back a total of  $793 for a $325 loan.  If the borrower can't pay back the loan when it is due, he or she doesn't get any more money, but pays another fee to roll the same loan over and avoid overdrawing.  Ninety  percent of payday lenders’ profits come from loans that are rolled over.

• False threats:  Payday lenders sometimes threaten borrowers with criminal prosecution for writing “bad” checks.  In fact, there is nothing illegal about writing these checks (if there were, payday lenders would be aiding and abetting a crime each time that they told a borrower to write a post-dated check). .Nevertheless, many consumers are terrified by these false threats of criminal prosecution.

• Internet lending:  Using the Internet to borrow money increases the possibility of harm to the borrower.  Internet lenders are generally not  physically located in the borrower’s state and often aren’t even based  in the U.S.  They may lend over the Internet in order to avoid the protections of applicable state laws and to make it virtually impossible for the borrower or any government agency to find them.  In addition, borrowing over the Internet increases the chances of identity theft and other privacy violations.

• Disguised loans:  Some payday lenders pretend that they are selling goods or services in exchange for a check.  Others engage in “sale-lease” shams where the lender will “buy” some item of personal property and lease it back for a “rental” payment due in two weeks.  This differs from what a pawnbroker does because the lender doesn’t hold onto the item involved

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Which States Ban Payday Lending?

High cost payday loans are illegal in 15 states.  As of the end of 2008, the following states outlaw these very expensive loans:  

• Arkansas

• Connecticut

• Georgia

• Maine

• Maryland

• Massachusetts

• New Hampshire

• New Jersey

• New York

• North Carolina

• Ohio

• Oregon

• Pennsylvania

• Vermont

• West Virginia

Payday loans are also illegal in the District of Columbia, the Virgin Islands and Puerto Rico.  

In November 2008, voters in Ohio and Arizona soundly defeated payday loan industry ballot initiatives to preserve lenders’ rights to charge 391% APR.  Read the Center for Responsible Lending’s webpage about these victories.

In addition, Congress banned payday lending to service members and their families.

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Laws and Regulations: What’s Needed

The simplest and best way to end payday lending is a national 36% usury cap, which would eliminate not only payday lending, but car-title loans and refund anticipation loans as well.  Congress and the president could extend to the entire country the protections offered to the military.  But until this happens, struggles to eliminate payday lending will continue to take place on a state by state basis.

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More information about payday loans
 

Studies, reports, and more data on payday loans

AFFIL is grateful to the Consumer Federation of America for their help with this page.
Last Update:  January 2009.