Nine Signs of a Predatory Payday Loan
1. Triple digit interest rate
Payday loans carry very low risk of loss, but lenders typically charge fees equal to 400% APR and higher.
2. Short minimum loan term
75% of payday customers are unable to repay their loan within two weeks and are forced to get a loan "rollover" at additional cost. In contrast, small consumer loans have longer terms (in NC, for example, the minimum term is six months.)
3. Single balloon payment
Unlike most consumer debt, payday loans do not allow for partial installment payments to be made during the loan term. A borrower must pay the entire loan back at the end of two weeks.
4. Loan flipping (extensions, rollovers or back to back transactions)
Payday lenders earn most of their profits by making multiple loans to cash-strapped borrowers. 90% of the payday industry's revenue growth comes from making more and larger loans to the same customers.
5. Simultaneous borrowing from multiple lenders
Trapped on the "debt treadmill", many consumers get a loan from one payday lender to repay another. The result: no additional cash, just more renewal fees.
6. No consideration of borrower's ability to repay
Payday lenders encourage consumers to borrow the maximum allowed, regardless of their credit history. If the borrower can't repay the loan, the lender collects multiple renewal fees.
7. Deferred check mechanism
Consumers who cannot make good on a deferred (post-dated) check covering a payday loan may be assessed multiple late fees and NSF check charges or fear criminal prosecution for writing a "bad check."
8. Mandatory arbitration clause
By eliminating a borrower's right to sue for abusive lending practices, these clauses work to the benefit of payday lenders over consumers.
9. No restrictions on out-of-state banks violating local state laws
Federal banking laws were not enacted to enable payday lenders to circumvent state laws.