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October 01, 2006

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I used the services of one of those payday loan services and found, initially, that though the cost of borrowing was huge, when you are unable to get money for emergiencies any other way, this service was better than nothing. Now, however,I think they are unscrupulous vultures. My most recent experience: I had paid down the $400 loan I had taken to about $200 when I had to take a large amount of time off from work because my Mom was losing her battle with cancer. As a per diem employee, I had no sick or vacaction time, so the time I took was unpaid. I tried to work atleast enough to cover that loan payment, but when my Mom went into the hospital because she was too ill to be managed comfortably at home, I knew this was my last time with her and stopped working for that 2 week period, until shortly after her death May 10. Any how, as a per diem, no work means no pay, so I called the loan company and explained to them the situation as soon as I knew I was going to be with out pay for a week or 2, they agreed to suspend making the ACH withdrawals from my account for 2 pay cycles, starting with the one that would have been $0 pay. They made sure I understood that I would continue to accrue interest charges, etc.... And..... continued to take (or attempt to take) the funds from my account MORE frequently than they had before!! (it was every 2 weeks, they began every week). This was costing me $120 in NSF fees. My bank would not freeze my account until the negative balance was resolved but every time that happened, there was another withdrawal. Being out of work for 4 weeks and having had to pay for my Moms final expenses, there was no way to keep the balance at or above 0. The bank claimed the could not stop the withdrawals because I had authorized them and the only way to revoke the authorization was through the very people who were causing the problem in the first place. They did finally stop it, the locked up my entire account due to so many NSF's. Now, in addition to owing my bank over $200(and all ready having paid about $300 in NSF fees), this lender now sends me a bill for (sit down for this one) over $1000!!!! And I did try several times to rectify the situation with this company, the first few times they said it was an over sight on their part. Then the 2 cycle period was over and they resumed attempting withdrawals as before, but since I had such a huge neg. balance and other things had happened in the meantime with my job, I just could not catch up on those payments.

Any way, I have learned my lesson, in the end it really is better to choose to do with out rather than deal with lenders like that, whether it is forgoing gas in the car for a doctors co-pay or eating Ramen noodle soup for a month to pay for that utility bill.

Thank you for reading.

I forgot to mention, when they take the loan payments, they do an ACH transaction once for the payment itself, then a separate transaction for the interest, and, as with paper checks, if payment did not go through, they were able to try again one time. So, on the regular terms, when there were NSF, they caused NSF fees up to $120 per 2 weeks. When the were attempting withdrawal every week, it was costing me twice that amount.

At least in Pennsylvania, it's the term of these loans (usually two weeks, a month, maybe) that makes them legal. Same with the refund-anticipation loans the tax-return places like to give out. I'm not sure on the details of that, but I did find an advocacy group that explains another loophole the payday-loan places have; they're affiliated with national banks, to which the same usury standards do not apply.

An excerpt:
"Payday lending in not authorized by Pennsylvania law, but it has been going on anyway due to the existence of partnerships between payday lending companies and out-of-state banks. While Pennsylvania usury law would prohibit payday lenders from making these directly, banks are not covered by state usury laws. By making the loans in the name of the banks, the payday lenders have been able to circumvent the law. However, pressure from the FDIC has resulted in all such banks pulling out of these partnerships during the last several weeks."

Full link: http://pennpirg.org/PA.asp?id2=22817

In Illinois, payday loans stores and similar businesses are perfectly legal, and can charge whatever interest rate they like.

From http://www.dcba.org/brief/julissue/2005/northern0705.htm:

"Although “payday loans” are exempt from Illinois’ criminal usury laws, “payday loan” lenders must abide by the regulations of another Illinois’ law, the Consumer Installment Loan Act. This act requires all businesses that make loans for under $25,000 to obtain a license from the Illinois Department of Financial Institutions, if the business is charging an interest rate that is higher than what would normally be allowed if the business did not have such a license. The Consumer Installment Loan Act essentially can be applied to all small loan lenders who wish to make loans at a rate greater than the state’s usury rate (currently 25%).

Lenders who do receive a license under this Act are allowed to charge any interest rate on the short term loan, so long as the borrower agrees to such a rate. In exchange for the ability to charge a higher interest rate, the lender must agree to disclose the interest rate to the buyer as an annual percentage rate (APR), and the loan must be repaid within 15 years and 1 month. The lender is also not allowed to loan the borrower more than $40,000 of these short-term loans at any one time.

The Illinois Department of Financial Institutions Regulations is authorized under the Consumer Installment Loan Act to make further rules and regulations concerning short-term loans, such as “payday loans.” The current regulations from the department limit the amount that may be borrowed in each loan, and the number of times a consumer is able to “rollover” or refinance a short-term “payday loan.” Currently, the regulations provide that a short-term loan that is not title-secured cannot exceed $400 per loan; short-term loans that are secured through a title can be made up to $2,000.15 A borrower may also refinance these short-term payday loans up to two times, provided that the borrower pays at least 20% of the loan’s outstanding balance. When the borrower is entering into a new loan contract (not just refinancing or “rolling over” current debt), the borrower must wait at least 15 days after the end of the existing loan contract before he or she enters into the new loan. Because of the dangers these high interest rate loans may pose for consumers, the regulations also require lenders to provide borrowers with pamphlets that describe the borrower’s rights and responsibilities, and the availability of debt management services.

Claims of violations under the Consumer Installment Loan Act may be brought as a private civil action or by Illinois’ Director of the Department of Financial Institutions."

******

There may be also a public policy defense to these exorbitant interest rates and penalties, but I have not yet seen any case law on it - not to say that the case law doesn't exist.

Bottom line: payday loan stores can get away with charging whatever interest rate they want in Illinois as long as the store is licensed, the loan is supposed to be repaid in 15 years and 1 month, and the borrower agrees to the interest rate.

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