Payday Loans: Too Pricey To Be Helpful
Authored By: Iowa Legal Aid
What are Payday Loans?
A payday loan business is a “Delayed Deposit Services Business.”
- Also known as “Cash Advance Loans” or “Check Advance Loans.”
A payday loan business will, for a fee:
- Accept a post-dated check, or
- Accept a check with the current day’s date and holds the check usually until the next payday.
Since these are high risk loans, the lender will only give you cash for a large fee with the promise from the customer to pay the amount of the loan, fees, and interest usually in two weeks or next payday.
- If you do not pay back the loan on time, the lender will try to collect not only the original amount, but also 325% interest and penalties.
- Payday loan businesses must get a license every year from the Iowa Division of Banking.
How do Payday Loans work?
The lender gives you cash in exchange for your check and charges a “service charge.”
- This “service charge” is the profit for the business and works like interest on your loan.
For example, if you want $200 cash today, you agree to let the lender cash your check for $225 in two weeks.
- This means that your annual percentage rate is 325%.
- An average rate from a bank would only be about 12%.
What if I can’t repay my Payday Loan on time?
- If your check bounces, the lender can add a $15 fee to the loan.
A loan is considered overdue when it has not been paid 10 days past the due date.
- The fees will continue to build up until the entire amount owed is paid.
After the 10 day period, the lender must provide you with 20 days of notice of “right to cure,” giving you a chance to pay off the loan.
- The lender will also call, send letters, and do everything they can to collect on this debt.
- After the 20 day notice period, the lender may sue you in court for the loan amount plus fees.
Why are Payday Loans not a good idea?
You will pay extra money for this type of loan.
- If you get a $200 payday loan every two weeks for one year, you would pay $650 in interest charges.
- If you get a $200 loan from a bank at 12% interest for a year, you would only pay $24 in interest.
Payday loans are hard to repay by the next payday.
- When people cannot pay back the loans they already have, they get trapped in a cycle of debt.
What should I do if I need money quickly?
- Before you take out a payday loan, call your creditors to try working out a payment plan.
Call local banks and credit unions to see if you can get a short-term loan with a low interest rate.
- These loans will cost less than payday loans.
- Some places might have overdraft protection services that will help you avoid overdraft charges.
What are the limits on a Payday Loan?
- Payday loan businesses cannot have more than 2 checks from one person at a time.
- The total amount of all checks from one person cannot be more than $500.
- Checks cannot be held for more than 31 days.
- A lender cannot make you accept the money in a way that causes you to pay more fees or charges.
- The fee cannot be higher than $15 on the first $100 of the loan.
- Each additional $100 on the loan cannot have a fee higher than $10.
The written notice that you receive from a payday lender must tell you:
- The actual fee charged for the loan.
- The annual percentage rate for the first $100 and for any additional $100.
- The date when the lender will deposit the check.
Any penalty that the lender will charge if the check cannot be deposited on the date agreed upon.
A $15 “bad check fee” can only be collected once by the lender.
- Payday loan business must clearly display a schedule of all fees, charges, and penalties for its services.
What if the Payday Loan business breaks the rules?
A payday loan business that violates Iowa laws can be sued by a debtor for damages, attorney fees, and court costs.
- The statutory penalty for these violations is $100-$1,000.
If you have questions about payday loans, feel free to contact Iowa Legal Aid.