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.