Payday loan fees may not be "interest" but it still adds up to misery for borrowers
Written by: Talbert Williams
Arkansas has long had some of the strictest lending laws in the
country. Twenty five years ago when interest rates on auto loans
were near 20% nationally, Arkansas law required dealers to
charge no more than 10% interest. People were flocking to the
state from all over the country to buy cars there in order to
save a fortune in interest charges. For years, Arkansas law
prohibited cash advance loans, or payday loans, due to their
usurious nature. But in 1999, the state passed the Check Cashers
Act, which authorized the loans but maintained that the fees
that accompanied them were not interest.
The 1999 law limits the interest rates on loans offered within
the state to 17% per year. A typical payday loan may have
interest rates that range from 300% to 1000% per year, a rate
prohibited by the Arkansas Constitution. By having the law
specifically state that the charges to obtain the loans were not
interest, the payday loan industry was able to charge their
usual fees without having to find a way to circumvent the law.
Left out in the cold, however, were traditional lenders, such as
banks and auto dealers, who are still limited by the 17% cap.
A judge recently ruled in a lawsuit that the Check Cashers Act
is valid, and that the fees associated with payday loans are not
interest. The plaintiff in the lawsuit, who represented several
borrowers who had taken out payday loans, has promised to appeal
to the state Supreme Court.
With a payday loan, a borrower borrows a sum of money for a
short period, usually two weeks. That sum of money, which
usually runs from $100-500, is accompanied by a "fee" of
anywhere from $15-30 for every $100 borrowed. The borrower
writes a postdated check to the lender at the time of the loan.
It is assumed that the lender will cash the check on the due
date. If the borrower cannot repay the loan in time, he or she
can extend the loan by paying the fee again.
These fees are usually regarded by those who watch the industry
as interest. After all, interest is defined by our dictionary as
"a charge for a loan, usually a percentage of the amount
loaned." That certainly sounds like a description of the fee
charged by these cash advance loan stores, doesn't it?
And if the Check Cashers Act states otherwise, is interest not
Those who work in the cash advance loan industry are quite adept
at finding ways to skirt state laws. If the Arkansas Supreme
Court should rule that the fees are interest, and that seems
likely, the lenders will simply find other ways to work around
the law. Lenders in other states have done so by issuing the
loans through out of state banks which are headquartered in
states, like Utah, which have liberal lending rules.
The state may use whatever terms it likes. Interest or fees, it
doesn't really matter. It's still an expensive way to borrow
About the author:
Talbert Williams offers debt consolidation referrals and
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