A payday loan is a short-term loan that you borrow against your next paycheck. The lenders charge sky-high interest rates and structure the loans to make repayment difficult. It’s a predatory lending practice that takes advantage of people when they’re running out of options. It’s illegal in New York, New Jersey, and Connecticut, but residents are still getting payday loans. Despite the law, payday lending is alive and well in the tri-state area.
You’ve probably seen commercials advertising quick payday loans. You borrow the money, you pay a fee, and you pay the loan back with your next paycheck. Of course, it’s not that simple. The fees generally equate to interest rates in the range of 650-1000%. In New York, the maximum legal interest rate is generally 16%. When you take out the loan, you leave either your checking information or a postdated check. When the term of your loan is up, the payday lender will cash your check or pull the funds directly from your account. If you don’t have enough to repay the payday loan and fees, then you’ll start racking up even more interest. Chances are you’ll never catch up.
How do lenders offer quick cash loans in states that prohibit them?
The Internet has changed the way people interact and do business. The banking industry is no exception. Payday lending is still legal (although highly regulated) in well over half the states. Payday lending websites act as lead generators for those payday lenders. Sometimes, the leads come from people living in states where payday lending is illegal. The state prohibitions on payday lending only apply to businesses in those states, so this legal loophole combines with the reach of the Internet to make payday lending possible everywhere. The websites allow lenders to skirt state laws and regulations and take advantage of borrowers.
In many cases, payday-lending websites have a quick, simple online application. You don’t have to provide much information about yourself – many online payday lenders have flashy buttons offering “Cash Now!” and “Two-Minute Application!” To get cash, you need only be employed and have a checking account. You can e-sign the agreement and they’ll give you the cash.
In brick-and-mortar payday lending centers, you’ll probably have to leave a postdated check for the amount you owe. Online, you’ll give them your checking information so they can pull the payment directly from your account. The ease of the process and the lack of a credit check makes payday lending an attractive option for those who can’t qualify for a traditional loan. Of course, those people are probably least able to afford a 600% interest rate.
Payday lending is a $40 billion dollar industry; it’s seen cutbacks from increased state regulation but booms from the declining credit scores of many Americans. No credit? Bad credit? Banks won’t lend you money – but payday lenders will.
Payday Lending Fraud
To make matters worse, borrowers need to worry about more than repaying a loan with a sky-high interest rate. Websites are cropping up offering payday loans and collecting fees from borrowers only to disappear overnight. They keep the fees and never give the loans. They’re robbing borrowers who are already strapped for cash.
Banks and Payday Lending
Banks offer only traditional loans and are carefully regulated by federal and state authorities. What do they have to do with payday lending? More than you might think. First, with new financial regulations and declining credit scores, many banks have to turn away people looking for loans. The banks simply can’t lend as much as they used to and they have to take greater care regarding the creditworthiness of borrowers. Some argue that the banks’ reluctance or inability to give small loans to borrowers is driving those borrowers into payday lending.
More importantly, banks allow payday lenders to draw loan payments directly from consumer’s bank accounts. The Automated Clearing House (ACH) system handles the direct deposits of paychecks and automatic payments for utilities and mortgages, among others. It’s an important system, but payday lenders use it to ensure that they get their money from borrowers.
What can we do about it?
In a recent lawsuit, several lenders just agreed to a settlement for payday loans to borrowers in the area. Some borrowers are bringing suit and fighting back. Lawmakers are also stepping in to try to curb the practice. They’re putting pressure on banks, too, as the crucial intermediary between borrowers and payday lenders. By allowing payday lenders access to borrower’s checking accounts, the banks facilitate the payday lending process. If you’ve been the victim of a payday loan scam or if you’re struggling with payday loan debt, speak to an experienced attorney about your rights. For free legal assistance, go to your state’s legal aid website. Here are the sites for New York, New Jersey, and Connecticut.
If I’m short on cash and can’t get a bank loan, what do I do?
If you’ve tried to get a loan from your bank or credit union and couldn’t, don’t go straight to the payday lender. First, consider asking your employer for an advance. Ask family and friends for a small loan. You may also be able to get a cash advance on your credit card. The interest rate will be higher than that of a traditional bank loan, but far lower than that of a payday lender. You’ll also have plenty of legal protection because credit card issuers are highly regulated.
Shop around and compare the costs of these different types of borrowing. If none of these options work for you, government programs may be able to give you the help you need to make ends meet. In New York, the Human Resources Administration offers temporary cash assistance. In New Jersey, WorkFirst performs the same service. In Connecticut, it’s Temporary Family Assistance. Temporary Assistance for Needy Families, a federal program designed to help families in need, backs these state programs.
Even if you don’t have cash, you have options. Don’t go to a payday lender and risk being scammed or falling into a spiral of debt.