CONSUMER NEWS RECALLS COMPLAINT FORM SCAM ALERTS

Small Claims Guide \| Class Actions \| Lemon Law \| FAQ \| Resources \| Newsletters \| Spanish
Automotive Education Electronics Family Finance Health Homeowners Shopping Travel

Beware of Payday Loans

December 29, 2004

• Consumers Playing Rebate Roulette This Holiday Season
• Beware of Zero Percent Financing
• Survey Finds Consumers Wary about Holiday Returns
• NYC Fines Retailers for Return & Restocking Fee Violations
• Retailers Urged to Curb Violent Video Games
• Smart, Careful Shopping Will Help Keep the Season Bright
• Video Game Industry Gets a D+
• Negative Option Scams May Snag Online Holiday Shoppers
• Black Friday Gives Wal-Mart a Black Eye
• Retailers' Return Policies Getting Tougher
• Watch Out for Hidden Toy Hazards
• Safety, Shopping, Charitable Giving Tips
• Nordstrom, Wal-Mart, L.L. Bean Top Customer Service Rankings
• Consumer Reports Holiday Guide
• The Gift That Keeps On Taking
• Tis the Season to Avoid Identity Theft
• Beware of Payday Loans
• Best of All: Giving Without Shopping

Illinois Attorney General Lisa Madigan is warning consumers to be wary of the many advertisements appearing in newspapers and on the radio touting low-cost payday loans during the holiday season and trying to lure in customers with items ranging from t-shirts to free turkeys.

Madigan said while these short-term loans may seem to be the answer to a cash crunch, they come at an incredibly high cost to the consumer.

Madigan noted the media is filled with advertisements and offers of extended hours during the holiday shopping season because they know this is the time of year when people need extra cash. However, what the payday lenders don’t advertise about the loans are the enormous cost of taking out such loans, loan terms that enable the lenders to dodge regulations set by state law, and annual percentage rates (APR) that often are well above 250 percent.

“During the holiday shopping season, consumers are flooded with a deluge of advertisements for payday loans appearing in the newspapers and on the radio,” Madigan said. “I recently saw a payday loan ad offering free turkeys and another shop is offering free t-shirts that say ‘It’s better than borrowing from your mother.’ The reality is that these loans will take the shirt right off of your back with costly fees and outrageous interest rates.”

A payday loan is a short-term loan obtained when a borrower writes a check dated in the future. To get a loan, a borrower must show the payday lender a pay stub and then write the lender a check for the cash loan. The check is usually made out for a later date – often one month and one day after the date of the loan. The lender gives the borrower cash in return, but for an amount less than the value of the check.

The difference between the amount for which the consumer writes the check and the amount the consumer is paid in cash is the lender’s profit, or finance charge. Payday l enders often charge between $15 and $50 for every $90 borrowed, which only covers the few short weeks of the loan term. After that, the consumer must pay the lender back or pay the lender even more in finance charges.

Most of the time, a consumer doesn’t have the funds in his or her checking account to cover the post-dated check when it is written, and may not have the funds when it comes time for the check to be cashed. When payment comes due, if consumers can’t cover the check, they are often encouraged to roll the overdue loan into a new loan, incurring new fees and increasing the amount of the loan. This loan “flipping” easily can lead to the consumer using most or all of the money borrowed to pay the lender’s costly fees.

Madigan said the Truth in Lending Act gives consumers the right to know the cost of any type of credit they apply for, including payday loans. Therefore, the lender is required to provide in writing both the APR and the dollar amount of all applicable finance charges.

While the Illinois Department of Financial and Professional Regulation regulates payday loans, payday lenders have found clever ways around the rules. For example, the industry dodges the rules by writing loans for 31 days or more, when the loans covered by state regulations have a 30-day limit on the loan term.

Madigan reminded consumers there are some community banks, credit unions and small loan companies that compete for consumer business by meeting their needs without making them pay exorbitant fees and interest rates. These banks will make short-term loans at comparatively low interest rates, and they require little more paperwork than the payday lenders to qualify the consumer for the loan. These lenders may prove to be far more affordable for the consumer when it comes to paying back the loan.

Report Your Experience
If you've had a bad experience -- or a good one -- with a consumer product or service, we'd like to hear about it. All complaints are reviewed by class action attorneys and are considered for publication on our site. Knowledge is power! Help spread the word. File your consumer report now.

May 16 2008

READER SERVICES

Print, Email & More

Free consumer newsletters
Sign up now!

Back to the top |

Terms of Use Your use of this site constitutes acceptance of the Terms of Use

Advertisements on this site are placed and controlled by outside advertising networks. ConsumerAffairs.com does not evaluate or endorse the products and services advertised. See the FAQ for more information.

Company Response Welcome If complaints about your company appear on our site, we welcome your response. Please see the Response Form for more information.

For more information, see the FAQ and privacy policy. The information on this Web site is general in nature and is not intended as a substitute for competent legal advice. ConsumerAffairs.com Inc. makes no representation as to the accuracy of the information herein provided and assumes no liability for any damages or loss arising from the use thereof.