Payday loans are small cash advances, usually of $500 or less. To get a loan, a borrower gives a payday lender a postdated personal check or an authorization for automatic withdrawal from the borrower’s bank account. In return, he receives cash, minus the lender’s fees.
For example, with a $300 payday loan, a consumer might pay $45 in fees and get $255 in cash. The lender holds the check or electronic debit authorization for a week or two (usually until the borrower’s next payday). At that time, the borrower has the option of (1) paying back the $300 in exchange for the original check, (2) letting the lender deposit the check for $300, or (3) renewing or rolling over the loan, if he is unable to repay it. Some lenders accomplish the same effect with “back-to-back transactions,” having the borrower write a check for a new advance, and using these funds to repay the prior loan. In renewal and back-to-back transactions, the borrower gets no “new” money, but pays another $45 in fees.
Pay day lending is a terribly ugly practice that exploits poor people and makes a mockery of the entire idea of “usury.” Too often the borrower ends up in a cycle of debt, repeatedly rolling over the original loan to a point where the accumulated fees and interest far exceed the amount borrowed Nearly every consumer advocacy organization in the country strongly argues that the entire practice should simply be illegal.
A good deal of evidence indicates that the pay day lenders particularly target military bases (the Department of Defense just issued a report arguing that the large number of soldiers who are falling into debt with pay day lenders is undermining our national security, and Republicans in both houses have introduced bills to bar pay day lenders from making loans to service personnel) and African-American neighborhoods. Because the borrowers have to pay back the full amount of the loan at one time, most borrowers tend to “roll over” their loans. In other words, the pay day loan is not a stop-gap measure for most borrowers, but creates a cycle of indebtedness. About 91% of all pay day loans are made to borrowers who will receive five or more pay day loans per year. The average borrower eventually pays $800 for a $325 loan.
Pay day lenders routinely charge interest rates of at least 350% and often more than 1000% to poor people for loans in violation of legislation in states across the country aimed at regulating lenders. In many instances courts have found such conduct to be unconscionable.
If you have been charged an unconscionable rate from a pay day lender, contact a lawyer that handles class action litigation to obtain recourse and to stop the unscrupulous practice of the lender from continuing.