Saturday, August 2, 2008

Variations on payday lending

A minority of mainstream banks offer advances for customers whose paychecks or other funds are deposited electronically into their accounts. The terms are similar to those of a payday loan; a customer receives a predetermined cash credit available for immediate withdrawal. The amount is deducted, along with a fee, usually about 10 percent of the amount borrowed, when the next direct deposit is posted to the customer's account. After the programs attracted regulatory attention, Wells Fargo called its fee "voluntary" and offered to waive it for any reason. It later scaled back the program in several states.
Income tax refund anticipation loans are not technically payday loans (because they are repayable upon receipt of the borrower's income tax refund, not at his next payday), but they have similar credit and cost characteristics. A car title loan is secured by the borrower's car, but are available only to borrowers who hold clear title (i.e., no other loans) to a vehicle. The maximum amount of the loan is some fraction of the resale value of the car. A similar credit facility seen in the UK is a logbook loan secured against a car's logbook, which the lender retains. These loans may be available on slightly better terms than an unsecured payday loan, since they are less risky to the lender. If the borrower defaults, then the lender can attempt to recover costs by repossessing and reselling the car.

Alternatives to payday loans

Many believe that payday loans are the only option for consumers with bad credit, but other options do exist and most financial counselors would direct people to explore the alternatives. Other options are available to most payday loan customers. These include pawnbrokers, credit union loans with lower interest and more stringent terms, credit payment plans, paycheck cash advances from employers, bank overdraft protection, cash advances from credit cards, emergency community assistance plans, small consumer loans and direct loans from family or friends.
Payday lenders do not compare their interest rates to those of mainstream lenders. Instead, they compare their fees to the overdraft, late payment, and penalty fees that will be incurred if the customer is unable to secure any credit whatsoever.
The lenders therefore list a different set of alternatives (costs expressed here as APRs for two-week terms):[citation needed]
* $100 payday advance with $15 fee = 391% APR;
* $100 bounced check with $48 NSF/merchant fees = 1,251% APR;
* $100 credit card balance with $26 late fee = 678% APR;
* $100 utility bill with $50 late/reconnect fees = 1,304% APR.

Payday loans in the UK

The number of payday loans has grown in the UK recently: between August 2007 and June 2008, the number of loans made grew by more than 130%.
Unlike in many US states, in the UK there is no prohibition on "rolling over" lending. There does not seem to be a usury limit either: one UK company offers a "typical APR" of 1355%, although this takes compounding into account; without compounding the APR would be 300%. Advertising of payday lending is subject to the Consumer Credit (Advertisements) Regulations 2004. In particular, the "typical APR" must be stated in adverts which meet certain criteria, such as adverts which indicate that credit will be given to customers who may otherwise find access to credit restricted.
There has been some criticism of these loans in the UK recently. Vince Cable MP said "The growing popularity of these loans highlights the problems stemming from the credit crunch and unsustainable levels of personal debt in the UK.". Chris Tapp, of Credit Action, said in mid 2008: "Over the past year, payday loans have become an issue in the UK, and the growth in people who have problems who have such a loan has been notable in the last six months.".

U.S. regulation and legislation

Regulation of lending institutions is handled primarily by individual states, and this growing industry exists atop an active and shifting legal landscape. Lenders lobby to enable payday lending practices, while opponents of the industry lobby to prohibit the high cost loans in the name of consumer protection.
Payday lending is legal and regulated in 37 states. In Georgia and 12 other states, it is either illegal or not feasible, given state law.[7] When not explicitly banned, laws that prohibit payday lending are usually in the form of usury limits: hard interest rate caps calculated strictly by APR.
In the United States, most states have usury laws which forbid interest rates in excess of a certain APR. Some payday lenders have succeeded in getting around usury laws in some states by forming relationships with banks chartered in a different state with no usury ceiling (such as South Dakota or Delaware). This practice has been referred to as "rate exportation", the "lender/servicer" model, or the "rent-a-bank" model. Under the legal doctrine of interest-rate exportation, established by Marquette Nat. Bank v. First of Omaha Corp. 439 U.S. 299 (1978), the loan is governed by the laws of the state where the bank is chartered. This is the same doctrine that allows credit card issuers based in South Dakota and Delaware — states that abolished their usury laws — to offer credit cards nationwide.[8] As federal banking regulators became aware of this practice, they began prohibiting these partnerships between commercial banks and payday lenders. The FDIC still allows its member banks to participate in payday lending, but it did issue guidelines in March 2005 that are meant to discourage long term debt cycles by transitioning to a longer term loan after six payday loan renewals.[9] As a result, no federally insured banks engage in the business of payday lending as of 2007 using an agency model.
For usury laws to be effective, they need to include all loan fees as part of the interest. Otherwise, lenders can charge any amount they want as fees and still claim a low interest rate. State laws in the United States generally preclude charging of fees other than those expressly permitted by law, and the federal Truth In Lending Act requires disclosure of all fees. Payday loans, because of their simplified pricing structure, do not contain hidden fees or charges.
Some states have laws limiting the number of loans a borrower can take at a single time. This is currently being accomplished by single, statewide realtime databases. These systems are required in Florida, Michigan, Illinois, Indiana, North Dakota, New Mexico, Oklahoma, and Virginia. These systems require all licensed lenders to conduct a real time verification of the customer's eligibility to receive a loan before conducting a loan. Reports published by state regulators in these states indicate that this system enforces all of the provisions of the state's statutes. Some states also cap the number of loans per borrower per year (Virginia), or require that after a fixed number of loan renewals, the lender must offer a lower interest loan with a longer term, so that the borrower can eventually get out of the debt cycle. Borrowers can circumvent these laws by taking loans from more than one lender if there is not an enforcement mechanism in place by the state. Some states allow that a consumer can have more than one loan outstanding (Oklahoma).

Pay day loans in India

ICICI Bank provides the pay day loan in India. It happens to all of us at times. Too much month (or week) and not enough money. But, when it does happen, our online payday loan services can provide you with up to £800 in cash at short notice before payday. Online Payday loans are often the most cost-effective way of borrowing short-term money and bridging the gap until you get paid.
You won’t have to take out a large, long-term personal loan or have to sell any personal property to get you through to payday. These are no credit check loan applications, and your payday loan application won’t impact on your credit rating.
In short, payday loans are dignified, quick and stress-free. And, you can arrange a payday loan here at epayday.co.uk, in a quick and easy payday loans process that gives you all the information you need to get started. Just fill in the online form and relax. How quick is ePayday Loans? Apply for a cash advance today and you could be spending your money on whatever you want by tomorrow

Payday loans in Canada

According to the Criminal Code of Canada, any rate of interest charged above 60% per annum is considered criminal. On August 14, 2006, the Supreme Court of British Columbia issued its decision in a class action lawsuit against A OK Payday Loans. A OK charged its customers 21% interest, as well as a "processing" fee of C$9.50 for every $50.00 borrowed. In addition a "deferral" fee of $25.00 for every $100.00 was charged if a customer wanted to delay payment. The judge ruled that the processing and deferral fees were interest, and that A OK was charging its customers a criminal rate of interest. The payout as a result of this decision is expected to be several million dollars.[5] The British Columbia Court of Appeal unanimously affirmed this decision. [6] Federal legislation passed in the spring of 2007 transferred regulatory authority on payday loans to the provinces.

Idea to loan

A borrower seeking a payday loan may write a post-dated personal check for $460 to borrow $400 for up to 14 days. The payday lender agrees to hold the check until the borrower's next payday. At that time, the borrower has the option to redeem the check by paying $460 in cash, or renew the loan (a.k.a. "flip the loan") by paying off the $460 and then immediately taking an additional loan of $400, in effect extending the loan for another two weeks. In many states, "flipping" or "rolling over" the loan is not allowed. In states where there is an extended payment plan, the borrower could choose to opt into a payment plan. If the borrower does not pay off or refinance the loan, the lender deposits the check. In this example, the cost of the initial loan is a $60 finance charge, or 390% APR.
When the Consumer Federation of America conducted a survey of 100 internet payday loan sites, it found loans from $200 to $2,500 were available, with $500 the most frequently offered. Finance charges ranged from $10 per $100 up to $30 per $100 borrowed. The most frequent rate was $25 per $100, or 650% annual interest rate (APR) if the loan is repaid in two weeks.

Internet lending

Online payday loans are marketed through e-mail, online search, paid ads, and referrals. Typically, a consumer fills out an online application form or faxes a completed application that requests personal information, bank account numbers, Social Security number and employer information. Borrowers fax copies of a check, a recent bank statement, and signed paperwork. The loan is direct-deposited into the consumer's checking account and loan payment or the finance charge is electronically withdrawn on the borrower's next payday.

Retail lending

Borrowers visit a payday lending store and secure a small cash loan, usually in the range of $100 to $500, with payment in full due at the borrower's next paycheck (usually a two week term). Finance charges on payday loans are typically in the range of 15 to 30 per cent of the amount for the two-week period, which translates to rates ranging from 390 percent to 780 percent when expressed as an annual percentage rate (APR)[1][3] The borrower writes a postdated check to the lender in the full amount of the loan plus fees. On the maturity date, the borrower is expected to return to the store to repay the loan in person. If the borrower doesn't repay the loan in person, the lender may process the check traditionally or through electronic withdrawal from the borrower's checking account.
If the account is short on funds to cover the check, the borrower may now face a bounced check fee from their bank in addition to the costs of the loan, and the loan may incur additional fees and/or an increased interest rate as a result of the failure to pay. For customers who cannot pay back the loan when due, members of the national trade association are required to offer an extended payment plan at no additional cost. In states like Washington, extended payment plans are required by state law.
Payday lenders require the borrower to bring one or more recent pay stubs to prove that they have a steady source of income. They are also required to provide recent bank statements.[citation needed] Individual companies and franchises have their own underwriting criteria.

what is payday loan

A payday loan (also called a paycheck advance or payday advance) is a small, short-term loan that is intended to cover a borrower's expenses until his or her next payday. Typical loans are between $100 and $500 and are due in two weeks, with interest rates of up to 400% APR. On a two-week loan, fees average $15 for each $100 lent.[1] The loans are also sometimes referred to as cash advances, though that term can also refer to cash provided against a prearranged line of credit such as a credit card.
Legislation regarding payday loans varies widely between different countries and, within the USA, between different states. Some jurisdictions impose strict usury limits, limiting the APR that any lender, including payday lenders, can charge; some outlaw payday lending entirely; and some have very few restrictions on payday lenders.
The industry's fast-paced growth indicates a successful business model with profitability typical of other consumer financial services businesses. Statistics compiled by the Center for Responsible Lending show that the majority of the industry's profit comes from repeat borrowers who are unable to repay loans on the due date and instead repeatedly renew their loans, paying fees each time.[2] The payday lending industry disputes these contentions.
Due to the extremely short-term nature of payday loans, the difference between APR and effective annual rate (EAR) can be substantial, because EAR takes compounding into account. For a $15 charge on a $100 2-week payday loan, the APR is 26 × 15% = 390% but the EAR is 1.1526 - 1 × 100% = 3686%. Careful reporting of whether EAR or APR is quoted is necessary to make meaningful comparisons.

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