Loophole in Credit Law Opens Door to 360 Percent Interest Rate

January 25, 2014
Daily Press (Virginia) 
payday lending news
Many consumers have become trapped by what is called an open-end credit plan, often marketed as payday loans, car title loans, or cash advances but referred to in the paperwork as a line of credit. Much like credit cards, these plans are supposed let individuals borrow as much as they want, up to a pre-set limit, and pay off the debt at their own pace -- as long as they meet a minimum monthly payment. Open-end credit plans, however, often come with steep fees and interest that can quickly snowball.

One consumer in Hampton, Va., borrowed $800 in March 2010 and repaid $680; but she still could not keep up with the interest, which grew by $221 a month. Another resident told the Virginia Poverty Law Center hotline that he had paid $1,750 over a three-month period toward a $1,000 open-end credit agreement and was turned away when he asked the lender for an easier repayment schedule.

Because of loopholes, open-end credit agreements are not subject to the interest rate or fee caps that other consumer loans must follow. They only must give borrowers a 25-day grace period to repay a balance with no interest charges, but court records show that even that requirement is not always honored. Last year, Advance 'Til Payday paid a fine of $10,000 fine and refunded 306 Virginians for not granting the grace period.

Firms in the open-end credit business have given more than $1.4 million to Virginia politicians over the last 10 years. Attempts to regulate the product have died in committee. Virginia Del. David Yancey (R-Newport News) wants to repeal an obscure, 30-year-old tweak to state law that was originally intended to allow stores to offer charge cards, but which paved the way for open-end credit plans.

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