Costly Cash at a High Price
Understanding Payday Loans
According to the Indiana Department of Financial Institutions (September, 2007), there are a total of 494 licensed payday loan locations in the state. Check cashers, finance companies and others are making small, short-term, high-rate loans also known as cash advance loans, check advance loans, post-dated check loans or deferred deposit check loans.
Usually, a borrower writes a personal check payable to the lender for the amount he or she wishes to borrow plus a fee. The company gives the borrower the amount of the check minus the fee (finance charge). In Indiana, the finance charge is regulated to 15 percent of the first $250, 13% of the amount between $250 and $400, and 10 percent of any amount between $400 and $550, with a maximum payday loan limit of $550 and a minimum term of 14 days.
A cash advance loan secured by a personal check - such as a payday loan - is very expensive credit. Let's say you write a personal check for $115 to borrow $100 for two weeks. The payday lender agrees to hold the check until your next payday. At that time, depending on the particular plan, the lender deposits the check, or you redeem the check by paying the $115 in cash. In this example, the cost of the initial loan is $15 for two weeks and a 391 percent Annual Percentage Rate (APR), which is the annualized cost of your loan. If you payoff your initial loan after two weeks and borrow again immediately and continue this the maximum number of times allowed by the law, you will have taken six loans at $15 per loan, and the finance charge would climb to $90 to borrow the same $100.
Alternatives to Payday Loans
Tips for Pursing Payday Loans
Under the Truth in Lending Act, the cost of payday loans - like other types of credit - must be disclosed. Among other information, you must receive, in writing, the finance charge (a dollar amount) and the annual percentage rate or APR (the cost of credit on a yearly basis).
For more information or to submit complaints, visit the Indiana Department of Financial Institutions or call 800-382-4880.
You may also submit complaints to Federal Trade Commission online or by phone: 1-877-FTC-HELP (1-877-382-4357), TTY: 1-866-653-4261. The FTC enters the complaints into Consumer Sentinel, a secure online database available to hundreds of civil and criminal law enforcement agencies in the U.S. and abroad.
The Consumer Protection Division of the Indiana Attorney General’s Office works to safeguard the rights of Indiana citizens every day. If you have questions or complaints regarding identity theft or other consumer issues, contact the Attorney General's Consumer Protection Division at 800-382-5516.
– Current as of 10-1-07 –