payday loans

Payday Loans Payday Loans Laws Protecting Montana Borrowers

2002

Authors:

Marsha A. GoettingMSU Extension Family Economics Specialist

Britta A. Schernthanner FCS Intern, MSU

MSU Extension MontGuide MT200102HR

www.montana.edu/wwwpb/pubs/mt200102.html

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Payday loan Industry • Emerged in response to Emerged in response to

consumer demand for small consumer demand for small loans for short periods of loans for short periods of timetime

Small Loans • Typically not made Typically not made by traditional by traditional lenderslenders• $50 to $300$50 to $300

Common Loan Names • Cash Advance Cash Advance • Payday Payday • Post dated Check Post dated Check • Delayed Deposit Check Delayed Deposit Check

Payday Lenders• MT DefinitionMT Definition

• Business that provides Business that provides loans from $50 to $300 loans from $50 to $300 for up to 31 daysfor up to 31 days

Montana Division of Banking & Financial Institutions

• Issues annual licensesIssues annual licenses• Conducts annual Conducts annual

examinations examinations

Montana Licensed Payday Lenders

• 9797• January January of 2004of 2004

How does a payday loan work? • Two ways Two ways are typicalare typical

Method 1 • Lender loans money to Lender loans money to

borrowerborrower• Lender accepts check for Lender accepts check for

loan amount plus feesloan amount plus fees

Method 1 (cont’d) • Borrower dates Borrower dates

check on day writtencheck on day written• Lender Lender holdsholds check for check for

agreed number of days of the agreed number of days of the loanloan

Payday Loan Example:

• Mary has too Mary has too much month left much month left at the end of the at the end of the money!money!

• Borrows $100Borrows $100

Mary Borrows $100 • Writes check for $113Writes check for $113

• $100 plus $13 fee$100 plus $13 fee• Dates check on day Dates check on day written, January 22written, January 22

Mary’s Payday Loan • 7 day loan7 day loan

• Payment Due Payment Due • January 28 January 28

• Lender deposits check for Lender deposits check for $113$113

Method 2• Lender loans moneyLender loans money• Lender accepts Lender accepts post post dateddated check for loan check for loan amount plus feesamount plus fees

Method 2 (con’d) • Lender holds check until Lender holds check until

date written on itdate written on it• Borrower can buy Borrower can buy

back check with back check with cash cash

Payday Loan Example:

• Mike has too Mike has too much month left much month left at the end of the at the end of the money!!!!money!!!!

Mike Borrows $100 • September 10 September 10

• writes checkwrites check for for $118$118

• Post dates checkPost dates check• September 21September 21

Mike’s Loan

• 12 days later12 days later• Lender deposits Lender deposits check for $118check for $118

Montana Montana Deferred Deferred Deposit Loan Deposit Loan ActAct October 1, 1999October 1, 1999

How much money may be borrowed?

• MaximumMaximum • $300$300• Plus feesPlus fees

How much money may be borrowed?

• MinimumMinimum• $50$50• Plus feesPlus fees

Costs for loans• Finance Finance ChargesCharges

• FeesFees

Montana Fee Cap• Can’t exceed Can’t exceed

25% of face value 25% of face value of checkof check

Example Fees on $100

• 4 days =4 days =• 10 days =10 days =• 15 days =15 days =• 20 days =20 days =• 30 days =30 days =

$10.00$10.00

$16.00$16.00

$22.00$22.00

$33.24$33.24

$33.25$33.25

Federal Law• Payday lenders must Payday lenders must

disclose finance charges disclose finance charges (fees) as(fees) as• Annual Annual Percentage Percentage

Rates Rates APRsAPRs

Shop Around• Compare Annual Compare Annual Percentage RatesPercentage Rates

• APRs APRs

Typical Loan APRs• 10% to 18%10% to 18%

• Banks, Savings & Loans, Banks, Savings & Loans, Credit UnionsCredit Unions

Typical Loan APRs• 16 to 21%16 to 21%

• Credit Card Cash Credit Card Cash AdvancesAdvances

Payday Loans: Typical APRs • 4 days =4 days =• 10 days =10 days =• 15 days =15 days =• 20 days =20 days =• 30 days =30 days =

913%913%

584%584%

535%535%

607%607%

406%406%

Table 1: Page 5• ExamplesExamples

• Fee AmountsFee Amounts• APRs, & APRs, & • Fee Rates per $100 Fee Rates per $100

Table 1: Page 5 Fees, APR, Fee Rates per $100LoanDays

FeeAmount

APR FeeRate

4 $10.00 913% 9.09%

15 $22.00 535% 18.03%

20 $33.24 607% 24.95%

30 $33.25 406% 24.95%

Montana Montana Deferred Deferred Deposit Loan Deposit Loan ActAct Additional Additional RulesRules

Payday loan cannot exceed

• 25% of monthly net 25% of monthly net income of borrowerincome of borrower

Example 1 • $1,110 $1,110 • x .25x .25• $ 275 limit on $ 275 limit on loanloan

Example 2 • $1,500$1,500• x .25x .25• $ 375 but loan limit is $ 375 but loan limit is $300$300

Borrower cannot• Have more than 2 loans Have more than 2 loans

outstanding at any one outstanding at any one time with single payday time with single payday lenderlender

Limitation• Total of two loans with Total of two loans with same lender can’t same lender can’t exceed $300 limitexceed $300 limit

Can loan be

extended? NO• Lenders prohibited from Lenders prohibited from

refinancing a payday loan refinancing a payday loan with proceeds of another with proceeds of another payday loan to same payday loan to same borrowerborrower

What does lender require from borrower?• Photo IDPhoto ID• Checking AccountChecking Account• Payroll StubPayroll Stub• Physical AddressPhysical Address

What does lender have to provide to borrower?

Two items1.1. PamphletPamphlet

2.2. Written LoanWritten Loan agreement agreement

Pamphlet• Explains borrower’s Explains borrower’s

rights & responsibilities rights & responsibilities for payday loanfor payday loan

Pamphlet• Telephone number for Telephone number for

Montana Department Montana Department of Commerce of Commerce • 406-444-2091406-444-2091

Pamphlet• Informs borrower that MT Informs borrower that MT

Dept of Commerce Dept of Commerce provides info about provides info about lender’s licenselender’s license

What does lender have to provide to borrower?

• Two itemsTwo items• PamphletPamphlet• Written LoanWritten Loan

agreementagreement

Requirements • Written Loan Written Loan agreementagreement

Loan Agreement• Name, address & Name, address & phone number phone number of lenderof lender

Loan Agreement• Means of Means of identifying identifying employee who signs employee who signs agreementagreement

Loan Agreement

• List of fees & interest List of fees & interest charges to be paid by charges to be paid by borrowerborrower

Loan Agreement• Description of Description of borrower’s borrower’s payment payment obligationsobligations

Statement• ““You cannot be You cannot be

prosecuted in criminal prosecuted in criminal court for collection of court for collection of this loan”this loan”

But…..If loan not paid

• Lender Lender can sue can sue in Civil in Civil CourtCourt

Civil CourtCivil Court• Can assess borrower Can assess borrower

• Court feesCourt fees• Attorney’s Attorney’s fees fees

Civil CourtCivil Court• Garnish Garnish borrower’s borrower’s wageswages

Civil CourtCivil Court• Place lienPlace lien on home or on home or other asset other asset

Alternatives to Payday Loans

Alternatives • Check cost of loan Check cost of loan

from bank, credit union, from bank, credit union, or savings & or savings & loan institutionloan institution

Alternatives

• Ask Ask employer for employer for advance on advance on paycheck paycheck

Alternatives

• Ask family or friends Ask family or friends for a short-term loan for a short-term loan

Alternatives • Is APR on credit Is APR on credit

card cash advance card cash advance lower than APR on lower than APR on a payday loan? a payday loan?

Alternatives • Use credit card to Use credit card to

make purchases make purchases & pay total & pay total when due when due

Alternatives• Use credit card to make Use credit card to make

purchases & make purchases & make monthly monthly payments payments

Alternatives• Ask creditors Ask creditors for more time for more time to pay bills to pay bills

Alternatives• Obtain overdraft Obtain overdraft protection on protection on checking checking accountaccount

How to avoid needing a Payday loan?

• Better management Better management of moneyof money

Track Income & Expenses

• Use info to develop spending plan

Establish Emergency Fund • Use these Use these

funds instead funds instead of payday loan of payday loan

Avoid these rates

• 4 days =4 days =• 10 days =10 days =• 15 days =15 days =• 20 days =20 days =• 30 days =30 days =

913%913%

584%584%

535%535%

607%607%

406%406%

Payday Loans Payday Loans Laws Protecting Montana Borrowers

2002