Download - 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