Coloradans for Payday Lending Reform


	Payday Lending What is Payday Lending? Payday lending (sometimes called cash advance) is the practice of using a post-dated check or electronic checking account information as collateral for a short-term loan. To qualify, borrowers need only personal identification, a checking account and an income from a job or government benefits, like Social Security or disability payments. Payday loans are secured by access to the borrower’s checking account, most commonly through a post-dated check or an automated clearinghouse (ACH) authorization. Often marketed to low- and moderate-income consumers as a quick and easy solution to an unexpected expense, these loans are generally due in about two weeks – on the borrower’s next payday. Costs vary state-by-state but lenders typically charge the maximum rate permitted by state law. In Colorado, it is $20 per $100 borrowed up to $300; and then $7.50 per $100 up to the maximum of $500. For a $300 loan, this would equate to a fee of $60 for two weeks, or an annual percentage rate (APR) of about 520 percent. Payday lenders argue that the APR is not a valid measure of the cost of a payday loan. They claim their product is short term, when in fact most borrowers’ experience with payday loans is one of long-term debt. Consideration of APR is important because it allows consumers to compare the cost of credit across products of varying terms. For example, it allows borrowers to compare a two-week payday loan, a six-month credit union signature loan, and an open-ended credit card cash advance. Indeed, the Federal Reserve notes that APR and other protections provided under the Truth in Lending Act allow for "uniformity in creditors’ disclosures (which are) intended to assist consumers in comparison shopping." How Payday Loans Work A customer seeking a payday loan needs only identification, a checking account, and proof of income from a job or government benefits. Payday lenders do not require the borrower to disclose debts or other obligations that would allow the lender to fully assess the borrower’s ability to repay the loan, nor is the borrower’s credit history taken into account. The borrower provides the lender with a personal check for the amount of cash they are receiving that day plus the fee. For the average $300 loan, a check might be written for $360 (the $300 principal plus a $52 fee). The lender promises not to cash the check until the loan comes due, usually on their next payday. The day the loan comes due, the borrower has several options. If the borrower has the funds to pay back the loan, the borrower can return to pay it off or simply allow the lender to cash the check. If the borrower cannot pay back his or her payday loan and get by until the next paycheck, which is frequently the case, the borrower must renew the loan, paying an additional $60 fee to extend the loan another two weeks. In states where renewals are not allowed, borrowers pay off the loan in full and then take out another payday loan either immediately or within a few days, commonly called a back-to-back transaction. Either way, the cost to the borrower is the same. —Center for Responsible Lending	Calculate the Cost of Using Payday Loans How much does it cost to borrow money from a payday lender? Many companies quote the cost of loans as the cost to borrow $100, such as $15 per $100 or $20 per $100. (In Colorado, it is $20 per $100 borrowed up to $300; and then $7.50 per $100 up to the maximum of $500.) Since the loan must be paid in a week or two, consumers may not realize how much loans cost under typical use. »Use a payday lending calculator created by the Consumer Federation of America. Other Resources Colorado Attorney General John Suthers is responsible for monitoring payday lending in the state. »Read the Attorney General's latest report. »Read the Attorney General's press release. Coloradans for Payday Lending Reform fact sheet Center for Responsible Lending fact sheet Center for Responsible Lending issue brief on APR Predatory Profiling, a new report from the Center for Responsible Lending You can help reform payday lending! If you have used a payday loan and been caught in a cycle of debt, tell us your story. Contact Us 303.297.0456 info@COPaydayReform.com