What is a payday loan?
A payday loan – which might also be called a “cash advance” or “check loan” – is a short-term loan, generally for $500 or less, that is typically due on your next payday.
Payday loans generally have three features:
- The loans are for small amounts.
- The loans typically come due your next payday.
- You must give lenders access to your checking account or write a check for the full balance in advance that the lender has an option of depositing when the loan comes due.
Other loan features can vary. For example, payday loans are often structured to be paid off in one lump-sum payment, but interest-only payments – "renewals" or “rollovers” – are not unusual. In some cases, payday loans may be structured so that they are repayable in installments over a longer period of time.
Some ways that lenders might give you the loan funds include: providing cash or a check, loading the funds onto a prepaid debit card, or electronically depositing the money into your checking account.
The cost of the loan (finance charge) may range from $10 to $30 for every $100 borrowed. A typical two-week payday loan with a $15 per $100 fee equates to an annual percentage rate (APR) of almost 400%. By comparison, APRs on credit cards can range from about 12 percent to 30 percent.
State laws and other factors can influence how much you can borrow and the fees you are charged. Some states do not have payday lending storefronts because these loans are not permitted by the state’s law, or because lenders may choose not to do business in a state rather than abide by the states’ regulations.
There are special protections through the Military Lending Act for active duty service members and their dependents who use certain payday loans and other small-dollar credit products.
Preventing Electronic Transfers
There are three things to consider when faced with this problem. First, do you think the transfer from your account is unauthorized (that is, you did not give permission or the lender is going beyond what you initially gave permission for)? Second, do you want to stop one or more payments out of a series you actually did authorize? Third, do you want to completely revoke (cancel) your authorization?
If you think that your payday lender is withdrawing more money from your checking account than you authorized, you should tell your bank or credit union that you are having trouble with “unauthorized transfers.” If anyone takes money out of your account without authorization, federal law requires the bank or credit union to take steps to stop that problem after you give them proper notice.
Stopping a series of transfers
You have some additional protections if your loan agreement calls for you to make regular electronic payments at repeated intervals, such as loans that are repaid through installments, and payday loans that are automatically set up to renew a certain number of times. You can stop one of a series of regularly scheduled payments by giving your bank or credit union oral or written notice at least three business days before the transfer is scheduled. The bank or credit union may require written confirmation of oral notice. They may charge fees for a stop payment.
Under rules that all banks, credit unions and lenders agree will govern electronic transfers, you can also revoke any authorization that you gave a payday lender to take money out of your account. You should follow the instructions in the initial authorization that describe how to tell the payday lender to stop. If there are no instructions on how to tell the lender to stop, then the authorization may be completely invalid – but you should still tell the lender to stop taking money from your account. Specifically, you should say: “my authorization to debit my account is revoked." You must send these instructions to your lender in writing. You should also keep a copy to take to your bank or credit union. Then tell your bank or credit union that any further transfers are “unauthorized” and you want them treated that way – either stopped or immediately refunded. If your bank or credit union does not follow your instructions, you should contact CFPB.
Federal Rule – Payday, Vehicle Title, and Certain High-Cost Installment Loans
As mentioned in the news clip above, the Bureau of Consumer Financial Protection has issued a final rule to create consumer protections for certain consumer credit products. The rule has two primary parts.
First, for short-term and longer-term loans with balloon payments, the Bureau is identifying it as an unfair and abusive practice for a lender to make such loans without reasonably determining that consumers have the ability to repay the loans according to their terms. The rule generally requires that, before making such a loan, a lender must reasonably determine that the consumer has the ability to repay the loan. The Bureau has exempted certain short-term loans from the ability-to-repay determination prescribed in the rule if they are made with certain consumer protections.
Second, for the same set of loans and for longer-term loans with an annual percentage rate greater than 36 percent that are repaid directly from the consumer’s account, the rule identifies it as an unfair and abusive practice to attempt to withdraw payment from a consumer’s account after two consecutive payment attempts have failed, unless the lender obtains the consumer’s new and specific authorization to make further withdrawals from the account. The rule also requires lenders to provide certain notices to the consumer before attempting to withdraw payment for a covered loan from the consumer’s account.
FINAL RULE; INTERPRETATIONS
Read it on the Federal Register – Nov. 17, 2017
View pdf – Oct. 5, 2017
Read it on the Federal Register – June 22, 2016
View pdf – June 2, 2016