The payday loan is also a small, short-term unsecured loan, "regardless of whether the loan repayment is associated with a borrower's pay." The loan is also sometimes referred to as "cash withdrawal," although the term may also refer to the cash provided to a pre-arranged credit line such as a credit card. Payday advance loans depend on customers who have payroll and previous employment records. The law on salary loans varies between different countries and, in the United States, between different states.
To prevent usury (unreasonable and excessive interest rates), some jurisdictions limit the annual percentage rate (APR) that each lender, including a paying lender, may charge. Some jurisdictions prohibit payday loans entirely, and some have very few restrictions on payday lenders. In the United States, this rate of borrowing was previously restricted in most states by the Uniform Small Loan Act (USLL), with 36% -40% APR generally normal.
Video Payday loans in the United States
Federal regulations
Payday loans are legal in 27 countries, with 9 others allowing some form of short-term loans with restrictions. The remaining 14 and the District of Columbia prohibit such practices. The federal regulations on payday loans are mainly due to several reasons: (a) a much higher level of bankruptcy among those who use loans (because the interest rate is as high as 1000%); (b) unfair and illegal debt collection practices; and (c) loans with an automatic rollover which further increases the debt to the lender.
As for federal regulations, the Wall Street Dodd-Frank Reform and Consumer Protection Act give the Consumer Financial Protection Bureau (CFPB) special authority to regulate all payday lenders, regardless of size. Also, the Military Loan Act imposes a 36% interest rate limit on tax refund and payday loans and car ownership loans made to members of the armed forces active duty and their covered dependents, and prohibits certain conditions in the loan the.
The CFPB has issued several law enforcement actions against payday lenders for reasons such as violating the prohibition of lending to military personnel and aggressive collection tactics.
CFPB also operates a website to answer questions about payday loans. In addition, some countries have been aggressively pursuing lenders that they feel are violating the laws of their country.
Payday lenders have effectively utilized the sovereign status of Native American reservations, often forming partnerships with tribal members to offer loans over the internet that circumvent state law. However, the Federal Trade Commission has begun to aggressively monitor this lender as well. While some tribal lenders are operated by Native Americans, there is also much evidence that is merely the creation of the so-called "rent-a-tribe" scheme, in which a non-indigenous corporation establishes operations in tribal lands.
Some states have laws that limit the amount of loans borrowers can take at a time according to the LATimes report. This is currently being solved by a single, real time database across the state. This system is required in Florida, Michigan, Illinois, Indiana, North Dakota, New Mexico, Oklahoma, South Carolina, and Virginia States Statues. This system requires all licensed lenders to verify the real time of the customer's eligibility to receive a loan before making a loan. Reports published by state regulators in these countries indicate that this system enforces all provisions of state law. Some states also limit the number of loans per borrower per year (Virginia, Washington), or require that after a number of loans are extended, the lender must offer a lower interest loan with a longer term, so the borrower may eventually get out of the debt cycle by follow some steps. The borrower may avoid this law by borrowing from more than one lender in the absence of enforcement mechanisms imposed by the state. Some countries allow that consumers can have more than one outstanding loan (Oklahoma). Currently, the state with the most paying lenders per capital is Alabama, Mississippi, Louisiana, South Carolina and Oklahoma.
Countries that have banned payday loans have reported lower bankruptcy rates, fewer complaint volumes on collection tactics, and the development of new loan services from banks and credit unions.
In the US, the Truth in Lending Act requires disclosure, including all fees and terms of payment.
Regulations in District of Columbia
Effective January 9, 2008, the maximum interest rate applicable to payroll lenders in the District of Columbia is 24 percent, which is the same maximum interest rate for banks and credit unions. The payday lender must also have a license from the district government to operate.
Banning in Georgia
Georgia's law prohibits payday loans for more than 100 years, but the state is unsuccessful in closing the industry until the 2004 law makes payday lending crimes, allowed for extortion charges and allowing potentially costly class action lawsuits. In 2013 this law is used to sue Western Sky, a tribal internet payroll lender.
Rules in New Mexico
The cost of New Mexico hats, limiting total loans by consumers and prohibiting direct loan rollover, in which consumers take new loans to repay previous loans, under the law of November 1, 2007. Borrowers who can not repay loans automatically offer payment plans 130 day, no charge or interest. After the loan is repaid, under the new law, the borrower must wait 10 days before obtaining another salary loan. The law allows a loan term of 14 to 35 days, with a limited fee of $ 15.50 for every $ 100 borrowed from 58-15-33 NMSA 1978. There is also an administration fee of 50 cents to cover the cost of the lender who verifies whether the borrower meets the terms for the loan, such as determining whether the consumer is still paying off the previous loan. This is done by verifying in real time against an approved lenders compliance database maintained by the New Mexico regulator. Statewide databases do not permit loans to be issued to consumers by licensed paying lenders if the loan will result in violation of state law. A borrower's cumulative salary loan can not exceed 25 percent of the individual gross income per month.
Withdrawal from North Carolina
In 2006, the North Carolina Justice Department announced the country had negotiated an agreement with all payday lenders operating in the state. The state is of the opinion that the practice of funding payday loans through banks leased in other countries illegally violates North Carolina law. Under the terms of the agreement, the last three lenders will stop making new loans, will only collect the existing loan principal and will pay $ 700,000 to the non-profit organization for assistance.
Sunset Operation in Arizona
Arizona's usury law prohibits lending institutions charging more than 36% annual interest on loans. On July 1, 2010, the law releasing payday loan companies from the 36% limit has expired. State Attorney General Terry Goddard started Operation Sunset, which aggressively pursued lenders who broke borrowing limits. The end of the law led many payday loan companies to close their Arizona operations, especially Advance America.
Post Banking Proposal
Many countries offer basic banking services through their postal system. The US Post Office Department offered such services in the past. Called the US Postal Savings System was discontinued in 1967. In January 2014, the US Postal Inspector General Service Office issued a white paper showing that the USPS can offer banking services, to include small dollar loans for under 30% APR. Both support and criticism are quickly followed, but the main criticism is not that the service will not help consumers but that payday lenders themselves will be forced out of business because the competition and plans are nothing more than schemes to support postal employees.
According to some sources, the USPS Board of Governors may authorize this service under the same authority that they are offering today's money orders.
Maps Payday loans in the United States
Industrial Growth
19th-century payday lender
In the early 1900s, some lenders participated in the purchase of salaries. Payroll is where the lender buys the next worker's salary for less than the salary, the day before the salary is paid. The purchase of this salary is an initial payday loan that is arranged to avoid the law of the usury of the country.
thawing 20 century checks
In the early 1930s, the cashiers cashed checks after the date for daily charges until the checks were negotiated in the future. In the early 1990s, cashier checks began offering payday loans in unregulated countries or loose regulations. Many payday lenders today register themselves in the yellow pages as "Check Cashiers."
1990s to present
Banking deregulation in the late 1980s caused some small community banks to go bankrupt. This creates a void in short-term microcredit supply, which is not supplied by large banks due to lack of profitability. Payday loan industries have sprung up to fill this void and supply microcredit to the working class with high prices.
In 1993, Check In Cash was founded by businessman Allan Jones in Cleveland, Tennessee, and eventually grew into the largest payday loan company in the United States. This business model was made possible after Jones contributed to legislator campaigns in several states, convincing them to legalize loans at high interest rates.
Furthermore, the industry grew from less than 500 storefronts to over 22,000 and a total size of $ 46 billion. This number has been rising higher over the years. In 2008, national payday loan shops outperformed the number of Starbucks stores and McDonald's fast food restaurants.
Deregulation also causes countries to return usury caps, and lenders can restructure their loans to avoid these caps after federal laws are changed.
State and federal rules on growth
The Consumer Financial Protection Bureau, in its June 2016 report on payday loans, found that loan volume decreased 13% in Texas after the January 2012 disclosure reforms. Reforms require lenders to disclose "information on how borrowing costs are affected by whether (and how many) are updated , typical payment patterns, and alternative forms of consumer credit that consumers might want to consider, including information ". The report says that the decline is due to borrowers taking fewer loans than borrowing smaller amounts each time. The re-borrowing rate declined slightly 2.1% in Texas after the disclosure law came into effect. The Consumer Financial Protection Bureau has proposed a draft regulation in June 2016, which will require payday lenders to verify the financial situation of their customers, give the borrower a disclosure statement before each transaction, and limit the amount of debt rollover allowed, bringing the industry down by 55 percent. Another option would allow the lender to skip the ability to repay the assessment for a loan of $ 500 or less, but the lender must provide a realistic repayment schedule and limit the amount of loans loaned for a year.
Debt Rollover
Rolling debt is a process in which borrowers extend the length of their debt to the next period, generally at a temporary cost still subject to interest. An empirical study published in The Journal of Consumer Affairs found that low-income individuals living in countries that allow three or more rollovers are more likely to use payday lenders and mortgages to supplement their income. The study also found that high-income individuals are more likely to use payday lenders in areas that allow rollover. This article argues that payroll loan rollover leads to low-income individuals becoming debt cycles in which they will need to borrow additional funds to pay the costs associated with debt rollover. Of countries that allow payday loans, 22 states do not allow borrowers to extend their debt and only three countries allow limited rollover. Countries that allow unlimited rollover leave the allowed rollover amount up to each business.
Borrow legality pay and rollover amount is allowed
Regulatory Effects
Price regulation in the United States has caused unintended consequences. Before regulatory policies were enacted in Colorado, the cost of paying financial fees was freely distributed around the market balance. The imposition of a price ceiling above this equilibrium serves as a target in which competitors can agree to raise their prices. This weak competition and the development of cartel behavior. Because salary loans near minority neighborhoods and military bases tend to have inelastic demand, these very high prices do not come with the lower amount demanded for loans, allowing lenders to charge a higher price without losing many customers.
In 2006 the congress passed a law limiting the annual rate at 36 percent that creditors could charge members of the military. Even with these rules and efforts to even ban industry directly, lenders still find loopholes. The number of countries in which payday lenders operate has fallen, from its peak in 2014 from 44 countries to 36 by 2016.
Competition and Alternatives
Payday lenders get competition from major credit unions, banks, and financial institutions, which fund the Responsible, Nonprofit Lending Centers that are battling wage loans.
Uber and Lyft offer Instant Payments and Express Pay for their drivers.
The NerdWallet website helps transfer potential borrowers to low-interest nonprofit organizations or government organizations that provide short-term assistance. Revenue comes from commissions on credit cards and other financial services that are also offered on the site.
A social lending institution for trusted friends and relatives can involve embarrassment for the borrower. The personal nature of payday loans is a way to avoid this embarrassment. Tim Lohrentz, program manager of the Insight Center for Community Economic Development, suggested that it might be better to save a lot of money than to try to avoid embarrassment.
Economic Effects
While designed to provide consumers with emergency liquidity, payday loans divert money from consumer spending and towards paying interest rates. Some large banks offer payday loans with interest rates of 225 to 300 percent, while online store and lender pay a rate of 200 to 500 percent. Online loans are predicted to reach 60% of payday loans by 2016. In 2011, $ 774 million lost consumer spending to pay for payday loans and $ 169 million lost to 56,230 bankruptcies related to salary loans. In addition, 14,000 jobs lost. By 2013, twelve million people take payday loans every year. On average, each borrower is supplied with $ 375 in emergency cash from each payday loan and the borrower pays $ 520 in interest. Every average borrower spends eight of these loans in a year. In 2011, more than one-third of bank customers issued more than 20 salary loans.
In addition to putting people into debt, payday loans can also help borrowers reduce their debt. Borrowers can use payday loans to pay the more expensive late fees on their bills and overdraft fees on their checking accounts.
Although borrowers usually have payday loan debts longer than the two-week advertised loan period, on average about 200 days of debt, most borrowers have an accurate idea of ​​when they will repay their loans. About 60% of borrowers repay their loans within two weeks of their predicted days.
When interest rates on payday loans are limited to 150% in Oregon, causing mass exit from industry and preventing borrowers from taking payday loans, there are negative effects with bank overdrafts, overdue bills, and employment. The effect is in the opposite direction for military personnel. Job performance and military readiness decreased with increasing access to payday loans.
Criticism
Demographics
Payday loans are marketed to low-income households, as they can not guarantee to get low interest loans, so they get loans at high interest rates. The study finds payday lenders to target young people and the poor, especially low-income populations and communities near military bases. The Consumer Financial Protection Bureau states that tenants, and not homeowners, are more likely to use these loans. It also states that married, disabled, separated or divorced persons are likely to be consumers. Interest rates on payday loans are relatively high compared to traditional banks and do not encourage savings or asset accumulation. This property will be exhausted in a low-income group. Many people do not know that higher borrower rates tend to send them to "debt spirals" where borrowers should keep on updating.
A 2012 study by Pew Charity research found that the majority of payday loans are taken to bridge the daily expenditure gap rather than for unforeseen emergencies. The study found that 69% of salary loans were borrowed for recurring fees, 16% were associated with unforeseen emergencies, 8% for special purchases, and 2% for other expenses.
Loan Failed
The Responsible Lending Center found that almost half of payday loan borrowers will fail in their loans within the first two years. Taking a payday loan increases the difficulty of paying mortgages, rent, and electricity bills. The possibility of increasing economic hardship leads to homelessness and delays in medical and dental care as well as the ability to buy drugs. For military men, using payday loans lowers overall performance and shortens service periods. To limit the issuance of military salary loans, the 2007 Military Loan Law sets a 36% interest rate limit on military payroll loans. A 2013 article by Dobbie and Skiba found that more than 19% of initial loans in their studies ended in default. Based on this, Dobbie and Skiba claim that payroll salary market is at high risk.
Premium Pricing Structure
A study of Pew Charitable Trusts 2012 found that the average borrower issued eight loans of $ 375 each and paid interest of $ 520 on all loans.
The equation for the annual cost of loans in percent is:
Informasi Asimetris
The payday loan industry takes advantage of the fact that most borrowers do not know how to calculate their loan APR and do not realize that they are being modified tariffs up to 390% interest annually. Critics of payday loans mention the possibility that transactions with in the payday market may reflect market failures caused by asymmetric information or bias or cognitive limitations of the borrower.
The formula for the total cost of Payday loan is:
di mana adalah uang yang dipinjam orang dari pinjaman gaji, adalah suku bunga per periode (bukan tahunan), dan adalah jumlah periode pinjaman, yang biasanya sepanjang 2 minggu.
For example, a $ 100 salary loan with an interest rate of 15% 2 weeks must be paid back as $ 115, but if not paid on time, within 20 weeks will be $ 404.56. In 48 weeks it will be $ 2,862.52. Interest can be much larger than expected if the loan is not returned on time.
Debt-Trap
A debt trap is defined as a "Situation where debt is difficult or impossible to repay, usually because high interest payments prevent principal repayment." According to the Center for Responsible Lending, 76% of the total volume of payday loans is due to a turbulent loan, in which the loan is taken within two weeks of the previous loan. The center states that the devotion of 25-50 percent of the wages of borrowers makes the majority of borrowers with insufficient funds, forcing them to immediately take out new salary loans. Borrowers will continue to pay high percentages to float longer-term loans, which effectively put them in a debt trap.
Debtors' Prison
Borrower jails were banned federal in 1833, but more than one-third of states in 2011 allowed late borrowers to go to jail. In Texas, some payday loan companies file lawsuits against late borrowers. Texas courts and prosecutors became de facto agents who warned borrowers that they could face arrest, criminal charges, jail time, and fines. On top of the outstanding debt, the district attorney charges an additional fee. Threatening to criminal prosecution of the borrower is illegal when post-dated examination is involved, but using a check date for a given loan day allows the lender to claim the theft. Borrowers have been imprisoned for owed at least $ 200. Most borrowers who fail to pay for their lost jobs or hours of work are reduced in the workplace.
See also
- The American Financial Services Association
- Buckeye Check Cashing, Inc. v. Cardegna
- Choke Point Operation
References
External links
- FDIC Guide on Pay Lending
Source of the article : Wikipedia
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