Why don't payday loans violate usury laws? [ed.]

Great Debates
21

This is true . . . to an extent. The SSCRA will protect you against default judgments while on a deployment (or on Temporary Duty, or in a school, a Reservist called to Active Duty away from home, etc.), but if you’re “in garrison” at home station while on active duty, you’re going to need to show up to that court date.

And like Raguleader said, a commander’s permission is not required to obtain a loan of any sort. For the Air Force, it is however, required if you are trying to get a second job somewhere (i.e. moonlighting at Lowe’s or a bookstore). This is to make sure your time spent elsewhere will not hinder or otherwise affect your military duties or bring discredit on the Armed Forces. They don’t want Airman Joe Bag O’Donuts working as a blackjack dealer while wearing his uniform. This is also another reason a SSgt (former) Michelle Manhart was reduced in rank and then dropped from active duty this past summer: she posed in Playboy and gave the impression of Air Force condonement. A Commander would have put the nix on that pretty quick. . .

So payday loan agencies do tend to prey on poorer areas, because they know the revolving need for credit and quick cash will always be there. The military is no different–they know Airman Joe Bag O’Donuts is going to fall short on a paycheck, and will need a little boost here and there.

[My $0.02]
My personal theory on why it’s a hot topic is that the media loves to focus on stories where “military members are victimized”. It’s hot political fodder too. . . that’s why there’s so much focus on the military payday loan scams, and the start of legislation against it. Never mind the fact that thousands more are being scammed by these folks. Once we remove certain social stigmas about pride and asking for money (like, from family or good friends), I would hope a lot of these places dry up quick–and title loan places too. . .
[/My $0.02]

Tripler
I had a friend once that applied for a second weekend job at a coffee kiosk. Job title: “Coffee Slinger” Job description: “sling coffee”. Commander found it hilarious, and signed off on it. :smiley:

22

I believe the payday loan places get around limits on interest rates by charging ‘fees’. If you have to pay a $10 fee every week to renew the loan it would be the same as an outrageous annual interest rate.

23

So according to Gfactor’s cites, basically the answer to the Thread Title is that they don’t because where payday loan shops operate, what they do **is ** within the legal allowances of the laws that regulate lending.

24

Here is a good article on credit cards and usury law: Lifestyle - Smart Spending & Frugal Tips | Bankrate.com

Most states define interest broadly enough to cover “fees” or just don’t define usury in terms of “interest.”

E.g.,

25

It seems to me that these “legal” loan sharking outfits, and unsecured/pre-approved credit card offers, flourished with the toughening of bankruptcy regulations.
Peace,
mangeorge

26

Doing a little further research …
It was a corporate policy to get permission of a CO for a payday or title loan because of Servicemembers’ Civil Relief Act and the limited ability of the loan agency to enforce the terms of the loan. This was not universal across the industry.

This is a moot point now.

27

That doesn’t look like a “yep” to me. Reagan wasn’t in office in 1980, so he can’t take any blame (or credit) for a law that was passed in that year.

28

Isn’t the real question why doesn’t anyone care that the weak and vulnerable among us are being preyed upon by the strong and the mighty?

Perhaps we’re all savy enough to avoid this trap but what of the less savy? It seems like the usury laws were there to protect them from this very thing.

Is it really okay for us to just stand by and watch? We see the trap, how cold and heartless it is and do nothing to change it. How is that okay?

29

Anya Kamenetz wrote an interesting piece on Payday Loans and their propensity for targeting military families, but I can’t find a linkable source. :frowning:

30

Hi all,
Embarassingly, I got involved with more than one pdl and I found this website debtconsolidationcare.com, which really helped give me the information regarding getting PDLs to work with me. I went from thinking I would have to close my account in order to get control over my paycheck again all the way to figuring out that I had 2 loans that were not legal in my state. I sent !ONE! email to both companies questioning their legality and they had broken a state law regarding extensions as well, and I got notification almost right away that they would mark them paid in full (not that happy of a story, as I ended up paying ALOT more than the original principal.). So I got my big mess reduced by 50% with a little information.

There are alot of states where the internet and storefront loans are not legal or have strict regulations regarding fees, interest, amount of time a loan can be extended, etc. The site I noted above was really informative and had alot of people who had been through the same thing.

31

Well, it’s true that these heartless corporations have put mom and pop loan sharks out of business.

And that’s the trouble. You can make extending ridiculously high interest loans to poor people illegal, and all that does is push loan sharking underground. At least nowadays the loan sharks are above ground, and don’t break people’s kneecaps if they’re late on a payment.

32

Having been there (poor), I can tell you that there are far more paycheck loan places than there ever were underground loan sharks. And most people would pay up as scheduled. The threat of harm was quite convincing. Actually, the shark was more likely to take property than break one’s leg. For small loans, anyway.

33

Good point. I stand corrected.

34

I believe that to calculate the high APRs for payday loans, the fees are added into the interest. The short duration of these loans makes this APR seem quite high. Mortgages aren’t required to put closing costs into APR calculations because closing costs are not part of the periodic payment. But because payday loans typically only have one payment, it is easier to mix fees and interest to calculate an APR with the two.

For example, if I took out a mortgage for $150,000 at 7% with $2000 closing costs, then the next week paid this loan off (say, after winning money), the interest charge would be about $200. However, I could complain that the mortgage company charged me $2200 for a one-week loan, and that amounted to an APR of 76%.

If payday loan places were only allowed to charge fees and interest that equaled prevailing rates for unsecured loans (say 22%), a one week loan for $500 would gain the loan company only $2.11.

I doubt that $2.11 would pay for processing, let alone the risk of unpaid loans. (This IS profitable for credit card companies because the fees that credit cards charge for transactions are charged to the VENDOR so they get more than just the 22% interest and because the system has lower transaction costs [Visa doesn’t have to rent a storefront, pay for armored cars to go to that location, and man it with someone to handle each transaction].)

I don’t know prevailing charges, but for a high-transaction cost short-term loan, I think the fees I’ve seen in the past were reasonable for an unsecured loan. If YOU were going to lend money to some random person who was promising to pay you back on payday (or even promising to give you his paycheck), and the money you were loaning and the interest earned would come from/go to your kid’s college fund, you’d probably want more than $2.11 to make it worth the risk and the time.

The problem really comes when people are buying multiple short-term loans, using them inappropriately as long-term loans. They should be using a different instrument (or, better yet, getting their financial house in order). But if these places aren’t allowed to charge fees without running afoul of usury laws, they won’t be able to afford to lend money on a short-term basis.

Would “society” be better off if people couldn’t get trapped by these? Probably (only probably because some people will screw themselves by whatever means possible, and I don’t know if the alternative to payday loan screwing (bounced checks, perhaps?) is better or worse). Is it worth depriving reasonable people of easy short-term loans in order to protect some people from themselves? Maybe not.

But to confuse fees with interest (especially in short-term, high-transaction cost loans where the interest will be trivial) and to confuse misuse of loans with reasonable use of loans isn’t helpful in understanding why people use these loans, why places are willing to lend, or how to keep people out of a trap.

35

As I said above, clearly the alternative to payday loans is illegal loan sharking. If you shut down the legal payday loans, people who have money troubles are going to see Guido down the street, and Guido doesn’t have to worry about violating usury laws, and none of his customers are going to complain because they don’t want to end up short a kneecap. Of course, usually it doesn’t come down to kneecaps, the mere knowledge that it COULD come down to kneecaps is enough to keep it out of the kneecap realm for all but the dumbest borrowers.

36

When I was in the Navy a couple friends and I ran what’s called a “slush fund”, which is strictly against the rules. Anyway, we loaned “five for seven” which we would give them five dollars (or multiples therof) and they would pay us back seven dollars on payday. How many days that was wasn’t an issue. We had an enforcer who would collect at the end of the pay line on payday. Nobody ever defaulted. No reason to, room and board were guaranteed.
We made a ton of money, hundreds of bucks each month apiece. And this was in the mid-sixties, when that was a lot of cash. So much so that we got nervous and disbanded. Two of the guys went independent, but on a very limited scale.

37

Micro-lenders in poor countries generally charge real rates of interest similar to what payday loans charge, and yet it is generally accepted than micro-lending has been a net positive for very poor communities, albeit they also face some of the same criticism.

38

Except micro-lenders are heavily subsidized non-profit organizations. Micro-lending is another form of direct aid, but without some of the negative externalities of simply handing over cash to people.

39

This discussion has drifted into GD territory. I’m going to move it from General Questions to Great Debates.

Gfactor
General Questions Moderator

40

I hope I’m not bringing back a thread that pretty much ran its course, but I used to work as an office manager of a payday lending store here in California. Our max loan was $255, and $300 was paid back (next payday, but no more than 15 days), and we would refer to the $45 as a “fee” rather than interest. We would also allow people to pay $45 on the loan due date to extend the loan another 15 days. We had one person who borrowed $255 and paid the $45 “fee” religiously every two weeks for over two years.

The legislators didn’t like how similar this was to a ridiculously high interest loan, and they changed the law (probably changed again since then, I don’t know) – people were no longer allowed to “refinance” their loan by paying the interest. So what did this mean to us? It meant that instead of customers refinancing, they would bring in the full $300 payment…and then they could borrow $255 again (most of them did). Believe it or not this did have an impact on business – some people just couldn’t come up with the $300 on their due date. In order to come with the difference, some of them went out and got another payday loan at another store. :smack:

More relevant to the original OP, I also had many people ask me how we got away with usury. I kind of wondered if they thought we were an illegal business, or if they were using some biblical definition of usury. Of course, I didn’t really have a good answer for them (“Well, it is legal, so I don’t think it’s usury…”).