With the moratoriums on evictions and foreclosures expiring at the end of the month, predatory lending practices will sadly likely be more prevalent this summer. Given that, we’ve decided to take a pause on our retirement series and revisit our predatory lending series.
This week we’ll return to our discussion on predatory lending and discuss payday loans.
Payday loans are short term, small cash advances of often $500 or less. Repayment is generally done through either postdated personal checks or authorization for automatic withdrawal from bank accounts. Payday loan fees can cost as much as 20% of the loan, and while they often need to have a term that’s at least as long as two pay periods, that means for those receiving weekly checks, they can be as short as 14 days. This can lead to excessively high financing costs, often equivalent to annual percentage rates well above 100%.
Looking at some statistics from 2015, four out of five payday loans are rolled over or renewed within just two weeks, largely because only 15% of borrowers are able repay all of their payday debt when it’s due. Also, three out of five payday loans are made to borrowers whose fees and interest will end up exceeding the amount they borrowed! In 2015 in Virginia, there were close to 200 payday lending locations that issued over 350,000 payday loans, for a total of nearly $140 million, an average of just over $350 per loan. These loans were issues to roughly 112,000 borrowers, meaning there were over 3 loans per borrower…in just one year! Also, the average APR for these loans were over 200%!
There are a number of payday loan regulations in Virginia aimed at limiting the impact of payday lenders. In Virginia, online payday loans are illegal, lenders are prohibited from lending to members of the military and their immediate family, and payday loans from a physical location cannot exceed $500. The terms of payday loans must be at least twice the borrower’s pay cycle, the APR is capped at 36%, and the loan fee cannot exceed 20% of the loan. However, for very short-term payday loans, like those with terms of just two weeks, this can still equal an equivalent annual percentage rate of well over 100%! Virginia payday loans cannot be rolled over and payday lenders cannot offer loans to borrowers who are currently in the process of repaying another payday loan. There are also further restrictions and mandated waiting periods for borrowers who have had five or more payday loans in a 6-month period and those who have repaid an extended term loan. Starting in January 2021, a number of new regulatory changes will be introduced to Virginia. Payday and short-term loans will be allowed up to $2500, however, the payday loans must have a term of at least four months, and payday lenders must make an effort to verify income and ensure borrowers are financial capable of repaying the loan on time. Towards the end of 2020, a number of federal regulations were introduced as well. Lenders can offer up to two extensions, but only if the borrower has paid at least a third of the loan, and lenders that unsuccessfully attempt an automatic withdrawal can only try one more time without explicit authorization from the borrower for additional attempts.
Next week we’ll return and discuss car title loans.