Payday Loans: An Expensive Way to Borrow Money
by: Iowa Legal Aid
March 1998
Payday loan businesses extend credit by giving cash in exchange for a check which is dated for some time in the future, also called a post-dated check. Service charges range from 10% to 18% of the check amount, and are taken out from the cash loaned. Most of the time a check from $50.00 to $500.00 is post-dated for one to four weeks. At the end of that time, the business deposits the check or the borrower pays cash or a money order to get the check back. If the borrower doesn't want the check deposited, he or she can exchange it for another post-dated check, with a new service charge withheld in some states. (This is not supposed to happen under Iowa's law.) If you figure the interest rate on these loans the same way banks calculate interest rates on their loans, the Annual Percentage Rates you pay for these loans can range from 145% - 6442%!!!!!
PAYDAY LOANS IN IOWA
In 1995, the Iowa Legislature legalized payday loan businesses. The law made them exempt from limits on interest rates that apply to other types of loans. The Act defines a "Delayed deposit services business" or payday loan business as a person who for a fee does either of the following:
a. Accepts a post-dated check; or
b. Accepts a check dated on the date it was written and holds the check for a period of time prior to deposit pursuant to an agreement with the maker of the check.
Payday loan businesses must get a license each year from the Iowa Division of Banking. The Division of Banking can revoke or suspend a license, and impose criminal and administrative penalties if a payday loan business breaks the law.
LIMITS ON PAYDAY LOANS
Limit on Charges
Fees on payday loans are limited to the following:
- No more than $15.00 on the first $100.00 on the face amount of a check, and
- No more than $10.00 on each additional $100.00 loaned, or a prorated amount for each additional $100.00.
At the time the payday loan is made, the lender must give the borrower a written notice. The notice must clearly show the items below.
- The fee to be charged for the transaction;
- The annual percentage rate (APR) on the first hundred dollars on the face amount of the check which the fee represents, and the APR on subsequent one hundred dollar increments which the fee represents, if different;
- The date on which the lender will deposit or present the check for negotiation;
- Any penalty, not to exceed $15.00, which the lender will charge if the check is not negotiable on the date agreed upon. A "bad check fee" shall only be collected once by the lender. The $15.00 "bad check fee" is the lender's exclusive remedy.
Payday loan businesses must clearly display a schedule of all fees, charges and penalties for all services provided.
Prohibited Practices by Lenders
In Iowa, payday loan businesses cannot hold more than two checks from one person at a time. The total amount of all checks from a single person can't be more than $500.00. Checks cannot be held for more than thirty-one days.
A payday loan business cannot require the borrower to receive payment by a method which causes the borrower to pay additional fees and charges to the payday loan business or another person. In addition, a payday loan business cannot repay, refinance, or otherwise combine an earlier payday loan with the money loaned through another payday loan made by the same business. Finally, a payday loan business cannot receive any other charge or fees in addition to the fees listed above.
In some cases, a person's post-dated check will "bounce" when the payday loan business tries to cash it. The payday loan business may threaten to bring criminal check fraud charges against the person. This is probably illegal under Iowa law. If illegal, it would violate Iowa's debt collection laws.
If a payday loan check bounces, the payday loan business can add a returned check fee of up to $15.00 to the loan. A payday loan business can sue the person to get a money judgment. A payday loan cannot be considered to be in default until ten days have passed from the date the loan came due. Before taking any action to enforce a payday loan agreement, a payday loan business must provide a twenty-day notice of right to cure to the borrower. The notice of right to cure informs the borrower that the loan has not been paid. It also says the borrower has twenty days from the date of the notice to pay the amount owed. The payday loan business cannot take any further action to collect the debt until the twenty day cure period expires.
A payday loan business that violates the laws which regulate it or any other provisions of the Iowa Consumer Credit Code is subject to a claim by the debtor for statutory and actual damages, as well as attorney fees and court costs. Often, the award of a statutory penalty of $100.00 to $1000.00 under the Iowa Consumer Credit Code may greatly reduce or eliminate the amount owed by the debtor to the payday loan business since those loans are limited to less than $500.00. If you have any questions about payday loans, please feel free to contact Iowa Legal Aid.
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