Payday Loans

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A customer goes into an establishment and writes a check to a lender. The check is written for an amount the check writer wants to borrow plus a fee that is either a percentage of the full amount of the check or a flat dollar amount. Sometimes there is an agreement to automatically debit or charge the borrowers checking account at a future date.

These transactions are referred to in a variety of ways such as"cash advances," "deferred presentments," "deferred deposits," "check loans," or most commonly as "payday loans."

The fact of the matter is that these loans are very expensive and should generally be used only as a very last resort and never for unnecessary expenses.

What are payday loans?
“Payday loans” are loans that last for a short time (usually 2 weeks) and have outrageous interest rates. These are often advertised as a way for people to get quick cash between paychecks. Usually, a borrower drops off a post-dated check for the amount borrowed plus a finance charge. If the borrower does not pay back the loan in cash or take out a new loan before the loan is due, the lender will cash the check.

Unfortunately, what often happens is that the borrower cannot pay back these loans, and is forced to renew or “rollover” the payday loan. Then the borrower has to pay more finance charges. It is often the case that if you need cash badly enough to take out a payday loan, you probably will not be able to pay it back in a few days or a week when payday comes along.

Is there a limit on payday loan finance charges?
Yes. On the first $100 you borrow the finance charge is limited to 15% or $15 for 14 days.

Can I renew or refinance a payday loan if I cannot pay it back on time?
Technically, no. The law regulating payday loans states that the agency cannot "for a fee" renew, roll over, or otherwise consolidate the loan.

However, payday lenders get around this portion of the law by offering to make you a new loan. The previous check is destroyed and you sign a new agreement for another short term loan in the amount of the old loan plus a new finance charge.

For example, you go to a payday lender on the 20th day of the month and write a check for $115, getting $100. When you get paid on the first day of the month, the date the loan is to be paid, all of your check is needed to pay the rent and utilities. You go back to the lender, who agreed to make a new loan until your next payday in two weeks for $115. So you write a new check for $130, to cover the old check of $115 and the new finance charge of $15. In two weeks a loan for $100 is already costing you thirty percent more than what you received. Yes, but there are limits. Remember that by renewing or “rolling over” your loan, you will have to pay more finance charges. If you took out a $200 payday loan, and were charged the maximum $25 finance charge on that loan, refinancing or “rolling-over” the loan would cost you another $25 and you would then owe $250. (The original $200 loan plus two $25 finance charges).

Can I get a payday loan anytime?
No. There are some times when a lender cannot give you a payday loan. A lender cannot give you a payday loan if the total amount of all payday loans is more than $500. A lender also cannot give you a loan if the lender knows that you have more than one other outstanding loan with a payday lender. You have to tell the lender about any other payday loan debts you currently have.

Note: Payday loans may include "charges," "costs," "fees," etc., which the law considers as finance charges, and are therefore subject to these limitations.

Can a payday lender have me criminally prosecuted if I do not pay my loan back?
No. A payday lender cannot use, or threaten to use, the criminal process to collect the payday loan debt. A notice to this effect must be posted on the premises in a very noticeable location. The notice should read as follows: "No person who enters into a post-date check or deferred deposit transaction with this business establishment will be prosecuted or convicted of writing cold checks or of theft by deception under the provisions of K.R.S. 514.040." The payday lender also CANNOT:

  1. Make false or misleading statements about payday loans;
  2. Contract for and collect attorney fees on payday loans;
  3. Change any information on the check that the lender is holding; or
  4. Charge more fees or higher interest than allowed.

What can I do if a payday lender violates this law?
You should seek legal advice from a private attorney or your local legal services office. Under the law, several things can happen to payday lenders if they do not follow the law. For example, if the payday lender violates the law, it might not have a right to collect debts from you. The lender may have to pay you $1,000 for each violation.

Should I avoid payday loans?
As with any financial decision, the borrower should understand the real costs involved with a payday loan.

Consider this secenario:

You write a check dated for two weeks from today for:   $256
You get back today:   $200
Interest and charges:   $56
The interest rate for a loan of two weeks is:   730% on an annual basis.

Compare this 730% interest rate loan to annual interest rates on credit cards of 15% - 25% and those are often considered outrageous.

As the law recognizes, “payday loans” should be used for short term cash needs. In reality, you should consider payday loans only in emergency cases in which there are absolutely no alternatives and the consequences for you or your family would be tragic without the money.

Consider how you are going to have the funds to pay back the loan next payday if you are running short this payday. You should try to get a regular loan from a bank or lending company if you can. They may have short-term loans available. You should also try to borrow money from friends or family members. You can go to your local food bank or various charities and church groups for food or financial help. If your child is enrolled in public school in Kentucky, the family resource center in the school may be an option for financial assistance. If you are short on the rent, talk to your landlord to see if the landlord will agree to let you pay late. (Get the agreement in writing if the landlord does agree). You should NEVER take out a payday loan for non-emergency purposes.

Reviewed August 2009