Frequently Asked Questions
About Predatory Payday Lending
Downloadable PDF version of Frequently Asked Questions
Why is payday lending “predatory?”
How can lenders charge 300% - $400% APR? Doesn’t
that violate usury laws?
What is an annual percentage rate (APR) and why is it so high on payday loans?
What is a “rollover?”
How are payday lenders making so much money?
Is one payday lending shop better than the others?
What can I do to STOP predatory payday lending?
Why is payday lending “predatory?”
Payday lenders target African
Americans and U.S. Military personnel for loans that carry over 390% annual
percentage rates of interest (APR)1. A recent analysis by the University of
Washington and the Seattle Post-Intelligencer found that twice as many payday
lenders are located in African American communities in Washington regardless
of the income levels of people in those neighborhoods2. Numerous government
reports have also found a high concentration of payday lending stores close
to U.S. military bases.
How can lenders charge 300% - $400% APR?
Doesn’t that violate usury
laws? Washington law gives special status to payday lenders over other financial
institutions allowing them to charge fees at rates and terms that add up to
390% for the typical payday loan. Payday lending is illegal in 15 states, and
of those state’s Georgia and North Carolina banned payday lending after
having made it legal for a short time because of devastating effects on the
financial well-being of state residents.
What is an annual percentage rate (APR) and why is it
so high on payday loans?
The annual percentage rate or APR on a loan is designed to help consumers determine
the REAL cost of a loan. It is a national standard required under national
fairness in lending laws and is designed to protect consumers from getting
trapped in bad loans and deals.
Payday lenders charge based upon a fee structure: $15 for every $100 they
loan to consumers, up to $500, and then $10 for every $100 up to $700. Most
of these loans are given out until the consumer’s next paycheck arrives
(usually 14 days) and then it comes due all at once, all in one big payment.
The APR is calculated using this formula (test out APR
possibilities with our calculator):
(fee / loan amount) x (365 days / days in loan term)
= APR
So APR on the typical payday loan in Washington is:
($75 / $500) x (365 days / 14 days) = 391%
What is a “rollover?”
Washington law prohibits lenders from extending
a loan. This is what regulators call an “illegal rollover.” Lawmakers
had intended to restrict this practice, however payday lenders get around this
restriction easily by offering back-to-back transactions the same day. Basically,
when borrower cannot repay, the lender issues them a new loan the same day
and puts the new loan toward paying off the first. The borrower is saddled
with new fees on a new loan and a whole new set of debt.
How are payday lenders making so much money?
Payday lending is big business
in Washington State. Last year payday lenders made over $164 million off of
fees charged to consumers. 91% of payday lenders profits in Washington come
from people who get stuck in debt and have to go back to payday lenders over
and over again3. According to the Department of Financial Institutions of Washington
State, payday lending has grown by over 113% in the amount of money loaned
since the year 20004.
Is one payday lending shop better than others?
All payday lenders in Washington charge the same fee structure and make triple
and quadruple APR loans. The fee structure is allowed under state laws. The
Community Financial Services Association, the corporate lobbying group for
payday lenders, has opposed all proposed consumer protections to limit APRs,
allow borrowers more time to repay loans and offer instant repayment plans
after the first time a borrower cannot repay. However, different payday lenders
have different practices for how they collect the money they are owed. Some
are more willing to offer repayment plans to some consumers when social service
agencies intervene.
What can I do to STOP predatory payday lending?
Visit the Action
Center to
see how you can get involved with Communities Against Payday Predators (CAPP).
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