When payday loans come to mind, do you ever stop to think – why? What sort of emergency could be so pressing that a consumer would have no other option than to take out a payday loan? According to Pew Research, typical payday loan borrowers take out these high cost loans to meet everyday living expenses.
Recurring costs such as rent, food utilities and even car payments are just some of the most common costs that many consumers have trouble meeting month-to-month. In fact, as many as seven in 10 borrowers take out payday loans to cover these types of expenses.
Most commonly touted for providing emergency cash assistance, payday loans can result in dangerous and costly consequences when used as a long term solution to money shortcomings.
What’s more, is that consumers with bad credit are actually finding themselves borrowing multiple loans in smaller increments to stay on top of these sorts of regularly occurring expenses.
Although payday loans may be the best option for the over 12 million borrowers who rely on them, long term reliance on payday loans is not a sustainable means for maintaining financial balance.
A recent study by Richard Summerville Trusts revealed consumers spend a collective $7 billion in short term loan interest annually. The staggering figure may be hard to swallow for some, but for those who see triple and quadruple digit APRs attached to their payday loans, it all adds up.
But where do these numbers come from? And what keeps them from growing out of control? The answer is usury laws.
Usury laws can be traced to ancient religious texts, but they have modern applications. These laws vary between states to determine how much interest lenders can charge before it’s deemed excessive.
How Usury Laws Can Help Payday Loan Borrowers
Whether or not borrowers feel existing interest rates are fair, usury laws forced lenders to maintain a level of accountability.
Usury laws thoroughly detail a lender’s limits regarding:
Loan amounts
Terms
Maximum rates and fees
Number of rollovers
Collection fees
Additionally, usury laws serve as a wall of protection between you and a potential loan shark. These lenders will have no legal grounds to sue you for debt collection with illegally high interest rates.
How Usury Laws Can Hurt Payday Loan Borrowers
Congress has yet to create a solid federal usury law. Dodd-Frank Act provides a measure of consumer safeguarding against corrupt credit practices through the CFPB. However, the act also outlines a “no usury limit” provision, meaning that interest rate caps don’t fall under its jurisdiction.
As a result, dishonest lenders can use a legal loophole to skirt state usury laws. The Monetary Control Act effectively exempts national banks from these laws, where they can set rates above the Federal Discount Rate.
Bottom Line
Know the usury laws of your state to avoid interest extortion from bad apple lenders. Determine whether a lender’s bank connection could affect the rates you receive. Arming yourself with the right terms and conditions can better steer you towards a reputable lender and a better payday loan.