3 Problems with Payday Loans

fish-hook-dollar-billsAs a bankruptcy lawyer, I’m not a fan of taking on debt. But if you’re going to borrow money, some ways are worse than others. One of the absolute worst is a payday loan.

Payday lending involves a borrower writing a post-dated check for the amount loaned plus a finance charge. After the debtor’s next payday, the lender collects the loan by depositing the check.

The payday loan business model is legal and regulated here in Indiana. In some other states, though, it’s against the law. Here are three of the reasons why payday lending is problematic at best and illegal at worst.

Sky-High Interest Rates

Payday lending has been called “legalized loan sharking.” The maximum finance charges allowed in Indiana are:

  • First $250 of the loan: 15%
  • Next $150 of the loan (i.e., the portion from $200 up to $400): 13%
  • Next $205 of the loan (i.e., the portion from $400 up to the legal limit of $605): 10%

If you’re thinking that doesn’t sound so bad, keep in mind we’re talking about short-term loans. If you borrow $250 for two weeks with a $37.50 finance charge, you’re paying the equivalent of a 391% annual interest rate.

The Rollover Trap

Repeat business is important to payday lenders. All too often, when that next paycheck arrives, the debtor can’t afford to repay the loan. Some lenders are willing to extend the loan for another pay period, but the borrower has to pay another finance charge in order to “roll over” the loan.

Rollovers are, strictly speaking, banned in Indiana. But the law contains a loophole that, in most cases, will allow the debtor take out a new loan immediately after paying off the previous loan. Either way, borrowers can get stuck in a cycle of debt.

Abusive Collection Tactics

If the borrower’s post-dated check bounces, the lender will try to get its money back through other means. In my experience as a bankruptcy attorney, improper collection methods are a serious problem in the payday loan industry.

A common collection tactic is threatening the debtor with prosecution for writing a bad check. As I explained in a previous post, these threats are a bluff, and they violate the federal laws that govern third-party debt collection agencies. Even if the lender handles its collection work in-house, Indiana law prohibits a payday lender from “[t]hreatening to use or using the criminal process in any state to collect.”

 

Matt Conrad is an Indianapolis bankruptcy attorney and the founder of Conrad Legal LLC, which helps people in Central Indiana get out of debt with Chapter 7 and Chapter 13.

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