Iowa

Payday Loans: Too Pricey To Be Helpful

Authored By: Iowa Legal Aid LSC Funded

Information

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.
  • Fee limits:
    • 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.

Last Review and Update: Nov 08, 2013