PayDay Loans

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PayDay Loans

  1. 1. Payday Loans Laws Protecting Montana Borrowers 2002
  2. 2. Authors: Marsha A. Goetting MSU Extension Family Economics Specialist Britta A. Schernthanner FCS Intern, MSU
  3. 3. MSU Extension MontGuide MT200102HR www.montana.edu/wwwpb/pubs/mt200102.html
  4. 4. Advertisements <ul><li>Quick Money!!! </li></ul><ul><li>No Credit Checks!!! </li></ul><ul><li>Fast Cash Loans!!! </li></ul><ul><li>Payday Advances!!! </li></ul>
  5. 5. Payday loan Industry <ul><li>Emerged in response to consumer demand for small loans for short periods of time </li></ul>
  6. 6. Small Loans <ul><li>Typically not made by traditional lenders </li></ul><ul><ul><li>$50 to $300 </li></ul></ul>
  7. 7. Common Loan Names <ul><li>Cash Advance </li></ul><ul><li>Payday </li></ul><ul><li>Post dated Check </li></ul><ul><li>Delayed Deposit Check </li></ul>
  8. 8. Payday Lenders <ul><li>MT Definition </li></ul><ul><ul><li>Business that provides loans from $50 to $300 for up to 31 days </li></ul></ul>
  9. 9. Montana Division of Banking & Financial Institutions <ul><li>Issues annual licenses </li></ul><ul><li>Conducts annual examinations </li></ul>
  10. 10. Montana Licensed Payday Lenders <ul><li>97 </li></ul><ul><li>January of 2004 </li></ul>
  11. 11. How does a payday loan work? <ul><li>Two ways are typical </li></ul>
  12. 12. Method 1 <ul><li>Lender loans money to borrower </li></ul><ul><li>Lender accepts check for loan amount plus fees </li></ul>
  13. 13. Method 1 (cont’d) <ul><li>Borrower dates check on day written </li></ul><ul><li>Lender holds check for agreed number of days of the loan </li></ul>
  14. 14. Payday Loan Example: <ul><li>Mary has too much month left at the end of the money! </li></ul><ul><li>Borrows $100 </li></ul>
  15. 15. Mary Borrows $100 <ul><li>Writes check for $113 </li></ul><ul><ul><li>$100 plus $13 fee </li></ul></ul><ul><ul><li>Dates check on day written, January 22 </li></ul></ul>
  16. 16. Mary’s Payday Loan <ul><li>7 day loan </li></ul><ul><ul><li>Payment Due </li></ul></ul><ul><ul><ul><li>January 28 </li></ul></ul></ul><ul><li>Lender deposits check for $113 </li></ul>
  17. 17. Method 2 <ul><li>Lender loans money </li></ul><ul><li>Lender accepts post dated check for loan amount plus fees </li></ul>
  18. 18. Method 2 (con’d) <ul><li>Lender holds check until date written on it </li></ul><ul><li>Borrower can buy back check with cash </li></ul>
  19. 19. Payday Loan Example: <ul><li>Mike has too much month left at the end of the money!!!! </li></ul>
  20. 20. Mike Borrows $100 <ul><li>September 10 </li></ul><ul><ul><li>writes check for $118 </li></ul></ul><ul><li>Post dates check </li></ul><ul><ul><li>September 21 </li></ul></ul>
  21. 21. Mike’s Loan <ul><li>12 days later </li></ul><ul><li>Lender deposits check for $118 </li></ul>
  22. 22. Montana Deferred Deposit Loan Act October 1, 1999
  23. 23. How much money may be borrowed? <ul><li>Maximum </li></ul><ul><ul><li>$300 </li></ul></ul><ul><ul><li>Plus fees </li></ul></ul>
  24. 24. How much money may be borrowed? <ul><li>Minimum </li></ul><ul><ul><li>$50 </li></ul></ul><ul><ul><li>Plus fees </li></ul></ul>
  25. 25. Costs for loans <ul><li>Finance Charges </li></ul><ul><li>Fees </li></ul>
  26. 26. Montana Fee Cap <ul><li>Can’t exceed 25% of face value of check </li></ul>
  27. 27. Example Fees on $100 <ul><li>4 days = </li></ul><ul><li>10 days = </li></ul><ul><li>15 days = </li></ul><ul><li>20 days = </li></ul><ul><li>30 days = </li></ul><ul><li>$10.00 </li></ul><ul><li>$16.00 </li></ul><ul><li>$22.00 </li></ul><ul><li>$33.24 </li></ul><ul><li>$33.25 </li></ul>
  28. 28. Federal Law <ul><li>Payday lenders must disclose finance charges (fees) as </li></ul><ul><ul><li>Annual Percentage Rates APRs </li></ul></ul>
  29. 29. Shop Around <ul><li>Compare Annual Percentage Rates </li></ul><ul><ul><li>APRs </li></ul></ul>
  30. 30. Typical Loan APRs <ul><li>10% to 18% </li></ul><ul><ul><li>Banks, Savings & Loans, Credit Unions </li></ul></ul>
  31. 31. Typical Loan APRs <ul><li>16 to 21% </li></ul><ul><ul><li>Credit Card Cash Advances </li></ul></ul>
  32. 32. Payday Loans: Typical APRs <ul><li>4 days = </li></ul><ul><li>10 days = </li></ul><ul><li>15 days = </li></ul><ul><li>20 days = </li></ul><ul><li>30 days = </li></ul><ul><li>913% </li></ul><ul><li>584% </li></ul><ul><li>535% </li></ul><ul><li>607% </li></ul><ul><li>406% </li></ul>
  33. 33. Table 1: Page 5 <ul><li>Examples </li></ul><ul><ul><li>Fee Amounts </li></ul></ul><ul><ul><li>APRs, & </li></ul></ul><ul><ul><li>Fee Rates per $100 </li></ul></ul>
  34. 34. Table 1: Page 5 Fees, APR, Fee Rates per $100
  35. 35. Montana Deferred Deposit Loan Act Additional Rules
  36. 36. Payday loan cannot exceed <ul><li>25% of monthly net income of borrower </li></ul>
  37. 37. Example 1 <ul><li>$1,110 </li></ul><ul><li>x .25 </li></ul><ul><li>$ 275 limit on loan </li></ul>
  38. 38. Example 2 <ul><li>$1,500 </li></ul><ul><li>x .25 </li></ul><ul><li>$ 375 but loan limit is $300 </li></ul>
  39. 39. Borrower cannot <ul><li>Have more than 2 loans outstanding at any one time with single payday lender </li></ul>
  40. 40. Limitation <ul><li>Total of two loans with same lender can’t exceed $300 limit </li></ul>
  41. 41. Can loan be extended ? NO <ul><li>Lenders prohibited from refinancing a payday loan with proceeds of another payday loan to same borrower </li></ul>
  42. 42. What does lender require from borrower? <ul><li>Photo ID </li></ul><ul><li>Checking Account </li></ul><ul><li>Payroll Stub </li></ul><ul><li>Physical Address </li></ul>
  43. 43. What does lender have to provide to borrower?
  44. 44. Two items <ul><ul><li>Pamphlet </li></ul></ul><ul><ul><li>Written Loan agreement </li></ul></ul>
  45. 45. Pamphlet <ul><li>Explains borrower’s rights & responsibilities for payday loan </li></ul>
  46. 46. Pamphlet <ul><li>Telephone number for Montana Department of Commerce </li></ul><ul><ul><li>406-444-2091 </li></ul></ul>
  47. 47. Pamphlet <ul><li>Informs borrower that MT Dept of Commerce provides info about lender’s license </li></ul>
  48. 48. What does lender have to provide to borrower? <ul><li>Two items </li></ul><ul><ul><li>Pamphlet </li></ul></ul><ul><ul><li>Written Loan agreement </li></ul></ul>
  49. 49. Requirements <ul><li>Written Loan agreement </li></ul>
  50. 50. Loan Agreement <ul><li>Name, address & phone number of lender </li></ul>
  51. 51. Loan Agreement <ul><li>Means of identifying employee who signs agreement </li></ul>
  52. 52. Loan Agreement <ul><li>List of fees & interest charges to be paid by borrower </li></ul>
  53. 53. Loan Agreement <ul><li>Description of borrower’s payment obligations </li></ul>
  54. 54. Statement <ul><li>“ You cannot be prosecuted in criminal court for collection of this loan” </li></ul>
  55. 55. But…..If loan not paid <ul><li>Lender can sue in Civil Court </li></ul>
  56. 56. Civil Court <ul><li>Can assess borrower </li></ul><ul><ul><li>Court fees </li></ul></ul><ul><ul><li>Attorney’s fees </li></ul></ul>
  57. 57. Civil Court <ul><li>Garnish borrower’s wages </li></ul>
  58. 58. Civil Court <ul><li>Place lien on home or other asset </li></ul>
  59. 59. Alternatives to Payday Loans
  60. 60. Alternatives <ul><li>Check cost of loan from bank, credit union, or savings & loan institution </li></ul>
  61. 61. Alternatives <ul><li>Ask employer for advance on paycheck </li></ul>
  62. 62. Alternatives <ul><li>Ask family or friends for a short-term loan </li></ul>
  63. 63. Alternatives <ul><li>Is APR on credit card cash advance lower than APR on a payday loan? </li></ul>
  64. 64. Alternatives <ul><li>Use credit card to make purchases & pay total when due </li></ul>
  65. 65. Alternatives <ul><li>Use credit card to make purchases & make monthly payments </li></ul>
  66. 66. Alternatives <ul><li>Ask creditors for more time to pay bills </li></ul>
  67. 67. Alternatives <ul><li>Obtain overdraft protection on checking account </li></ul>
  68. 68. How to avoid needing a Payday loan? <ul><li>Better management of money </li></ul>
  69. 69. Track Income & Expenses <ul><li>Use info to develop spending plan </li></ul>
  70. 70. Establish Emergency Fund <ul><li>Use these funds instead of payday loan </li></ul>
  71. 71. Avoid these rates <ul><li>4 days = </li></ul><ul><li>10 days = </li></ul><ul><li>15 days = </li></ul><ul><li>20 days = </li></ul><ul><li>30 days = </li></ul><ul><li>913% </li></ul><ul><li>584% </li></ul><ul><li>535% </li></ul><ul><li>607% </li></ul><ul><li>406% </li></ul>
  72. 72. Payday Loans Laws Protecting Montana Borrowers 2002

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