For those hardworking individuals who exist from one paycheck to the next without any savings or reserves for financial emergencies, payday loans have become both a lifeline and a sinking ship.
The problem is that once you take out one of these high interest loans, which generally must be repaid within the next two to four weeks, it will leave you short again to meet necessary payments for food, rent and utilities.
The only solution becomes to take one payday loan after another, known as rolling over, paying up to 15 percent interest for two weeks (an annualized rate of 390 percent interest) and being always under the collection gun.
Pursuant to the Washington StateDepartment of Financial Institutions, a payday loan is a small, unsecured, high interest, short-term cash loan. In most cases, consumers write a post-dated, personal check for the advance amount, plus a fee. The lender holds the check for the loan period and then deposits it, or the customer returns with cash to reclaim the check.
The law was revised as of January 1, 2010, to provide more consumer protections – here are the basic provisions:
- You may only borrow a total of $700 or 30 percent of your gross monthly income, whichever is less.
- Your information will be registered in a state-wide database, ensuring that all payday lenders have your most up-to-date loan information.
- You may only take eight payday loans per 12-month period.
- If you are unable to repay your loan before your loan is due, you may request an installment plan with no additional fees (note that the interest rate remains the same).
- If you currently have an installment plan you may not receive another loan.
- Lenders may not harass or intimidate you when collecting a loan.
Maximum Loan Term: 45 days
Maximum Loan Amount: $700
Maximum Fee: 15 percent on the first $500 and 10 percent above $500.
As a Tacoma attorney providing bankruptcyservices and proven debt solutions, I have had numerous clients with several outstanding payday loans that they could not repay. Were these individuals intentionally taking advantage of the system? Absolutely not; it was simply the payday loan system claiming more victims.
In the State of Washington, with broad exceptions, any interest charged in excess of the statutory maximum, which is currently 12 percent, is illegal and usurious. The most significant exception to the statutory maximum interest rate is in transactions primarily for agricultural, commercial, investment, or business purposes, with consumer transactions expressly excluded.
So how is it that payday loan companies often charge 300 percent interest or more? Doesn’t this sound like the old fashioned loan sharking practice your neighbor’s “uncle Vinny” had down the street that we have all seen in mobster movies?
The use of federally chartered state banks initially allowed these schemes. It is similar to the way credit cards from out-of-state banks are able to charge higher interest rates than Washington State allows.
Federal law allows national banks to “export” their interest rates, along with their product, to other states. The way it works is payday lenders affiliate with a national bank and use the bank’s charter to get around usury laws and other consumer protection laws to charge exorbitantly high interest rates on payday loans. Essentially, the payday lender can claim it’s the bank making the loan.
However, although the loan’s paperwork may have had the bank’s name on it, the payday lender was the one advancing and collecting the money. The national Office of the Comptroller of the Currency has put restrictions on this partnering of national banks but the payday loan industry has become firmly established and is here to stay.