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FAQs

Frequently Asked Questions

1. My payday lender said my loan would cost 15 percent but my loan documents say the annual percentage rate (APR) is almost 400 percent. What is an APR on a payday loan and how should I use it?

Answer: The APR, or annual percentage rate, is the standard way to compare how much loans cost. It lets you compare the cost of loan products on an “apples-to-apples” basis. Your lender must disclose the APR before you agree to the loan.

To calculate the APR, the interest rate and fees are compared to the amount you borrow and calculated over a one-year period. This allows you to compare the costs of a credit card to a six-month installment loan, or a two-week payday loan. It is also why APRs are often different from simple interest rates.

For example, if your payday lender is charging you a $15 fee for every $100 borrowed, that would be a simple interest rate of 15 percent. But if you have to repay the loan in two weeks, that 15 percent finance charge equates to an APR of almost 400 percent because of the very short term.

Here’s why: Consider the daily interest cost, $1.07 (or $15 divided by 14 days), then multiply that out for a full year (365 days, so $390.55). So, borrowing $100 would cost you $391 if the term were extended to one year – that’s 391 percent of the borrowed amount.

By comparison, the cost of borrowing the same $100 on a credit card with a 15 percent APR is $15 for one year, or about 57 cents for two weeks.

2. I heard that taking out a payday loan can help rebuild my credit or improve my credit score. Is this true?

Answer: Probably not. Payday loans generally are not reported to the three major national credit reporting companies, so they are unlikely to impact your credit scores.

Most storefront payday lenders do not consider traditional credit reports or credit scores when determining loan eligibility. They also do not generally report any information about payday loan borrowing history to the nationwide credit reporting companies.

However, if you don’t pay your loan back and your lender sends or sells your payday loan debt to a debt collector, it is possible the debt collector might report this debt to one of the major national credit reporting companies. Debts in collection could hurt your credit scores.

Likewise, some payday lenders bring lawsuits to collect unpaid payday loans. If you lose a court case related to your payday loan, that information could appear on your credit reports and may lower your credit scores.

3. How do I repay a payday loan?

Answer: In order to obtain a payday loan, you typically must either provide a personal check to the lender or an ACH (Automated Clearing House) authorization to electronically withdraw money from your bank, credit union, or prepaid card account. Carefully read your loan documents so you know exactly how repayment works.

Although you are generally required when obtaining a loan to provide a post-dated check or authorization for an electronic debit of your account, some lenders strongly encourage, or in some cases, require consumers to return to the store when the loan is due to “redeem” the check. Encouraging or requiring borrowers to return to the store on the due date provides lenders an opportunity to offer borrowers the option to roll over the loan or, where rollovers are prohibited by state law, to reborrow following repayment or after the expiration of any cooling off period.

If you do not return, your lender might repay itself by depositing your check to your bank or credit union or withdrawing funds electronically from your account.

If you have taken out a loan online, you likely provided an ACH authorization for the lender to electronically access your checking account for repayment on the loan due date. So, while the way you repay a loan may depend on whether you took out a loan in a storefront or online, usually you provide the lender a way to repay itself the full amount as part of the loan application process.

Some lenders might set up payments assuming you only want to pay a renewal fee on the loan’s due date and require you to take action several days before your loan comes due to pay it in full. This could result in you paying several rounds of renewal fees while still owing the entire original loan amount.

Make sure you understand how your loan will be repaid and how much the loan could ultimately cost you before agreeing to get any type of loan.

If you have problems with a payment authorization, such as the ACH was unauthorized or revoked, you may want to contact your state regulator or state attorney general. You can also submit a complaint to the CFPB at consumerfinance.gov/complaint or (855) 411-2372.

4. How can I tell if a payday lender is licensed to do business in my state?

If you want to know whether a payday lender is licensed to do business in your state, verify the information with your state regulator or attorney general.

Not all states allow payday lending. Some states allow payday lending and require lenders to be licensed. In some states, if a payday loan is made by a business that is not licensed in that state, the payday loan may be void. In that circumstance, the lender may not have the right to collect or require the consumer to repay the payday loan.

5. What do I need to qualify for a payday loan?

Generally, payday lenders require you to have:

  • An active bank, credit union, or prepaid card account
  • Proof or verification of income from a job or other source
  • Valid identification, and be at least 18 years old

6. What are the costs and fees for a payday loan?

Payday loans generally charge a percentage or dollar amount per $100 borrowed. The amount of this fee might range from $10 to $30 for every $100 borrowed, depending on your state law and the maximum amount your state permits you to borrow. A fee of $15 per $100 is common. This equates to an annual percentage rate of almost 400% for a two-week loan. So, for example, if you need to borrow $300 before your next payday, it would cost you $345 to pay it back, assuming a fee of $15 per $100.

Rollovers. If you are unable to pay when your loan is due and your state law permits rollovers, the payday lender may allow you to pay only the fees due and then the lender extends the due date of your loan. You will then be charged another fee and still owe the entire original balance. Using the above example, if you pay a renewal or rollover fee of $45 you would still owe the original $300 loan and another $45 fee when the extension is over. That’s a $90 charge for borrowing $300 for just four weeks.

Repayment Plans. Some state laws require payday lenders to offer extended repayment plans to borrowers who experience difficulty in repaying payday loans. These laws vary by state, and may or may not permit or require a fee for using a repayment plan.

If your state requires a lender to offer an extended repayment plan, you may be able to get additional time to repay your loan without any additional costs or fees. This means that you can pay off your loan rather than borrowing again, incurring more fees, and getting further behind in debt.

Late fees. In addition, if you don’t repay the loan on time, the lender might charge a late or returned check fee, depending on state law. Your bank or credit union may also impose an “NSF” or non-sufficient funds charge if your check or electronic authorization is not paid due to a lack of funds in your account.

Prepaid debit card. If your loan funds are loaded onto one of these cards, there might be other fees. There could be fees to add the money to the card, fees for checking your balance or calling customer service, fees each time you use the card and/or regular monthly fees.

Be sure to read the loan agreement carefully to spot all of the fees and costs before you take out a loan. If you have questions about your state law, you might find more information on the website of your state regulator or state attorney general.

7. Should I get a payday loan if I need money now?

Answer: Before choosing to take out a payday loan, think about the costs you will pay, whether you want to borrow, and how you will pay back the loan.

Cost:

If you take out a payday loan, you will likely be charged a fee of between $10 and $30 for every $100 borrowed. A $15 per $100 fee is typical. So, if you have an emergency and need $300 today, you would have to pay back $345 in a couple of weeks, assuming a fee of $15 per $100 borrowed. If your budget is already tight, that may be hard to do. In those states that do not ban or limit renewals or rollovers,the payday lender may encourage you to pay just the fee and extend the loan another few weeks. In that case, you would spend $45 and still owe $345 when the extension is over – that means you’re spending $90 to borrow $300 for one month.

Choices:

First, there may be alternative strategies available, including those that don’t involve taking out a loan. Some employers, nonprofit organizations, and community groups offer advances or emergency credit. And don’t forget about help from family or friends.

Second, if you have an account at a bank or credit union, there may be less expensive alternatives available to you, especially if you have a stable credit history. A credit card may also be another option.

Third, another option might be to negotiate with the creditor or debt collector about the debt or bill you owe. A smaller repayment amount may help make repayment easier.

Finally, if you are expecting a tax refund or an increase in income, think about using that money to start saving some money for the next emergency.

8. What is the difference between a payday loan and a deposit advance?

Answer: Payday loans and deposit advances are both short-term, high-cost loans. Some of the key differences are who makes the loans, how the loan is requested, and how they are repaid.

Payday lenders make payday loans online or to people who visit their storefront locations. In contrast, banks and credit unions that offer deposit advances generally do so only for their customers who have accounts with them and meet certain other eligibility requirements.

A payday loan is usually due to be repaid on the borrower’s next payday, which is often two to four weeks from the date the loan was made. The specific due date is set in the payday loan agreement. The borrower can either return to the payday lender to repay the loan or allow the lender to withdraw funds from a checking account.

With deposit advance, banks and credit unions will usually pay themselves back automatically when the next electronic deposit to the customer’s account is made, regardless of source, which could be much sooner than two to four weeks. If the amount of the incoming deposit is not enough to pay back the loan, the bank or credit union will repay itself out of subsequent deposits. Typically, if any loan balance remains after 35 days, the bank or credit union will automatically charge the customer’s account for the remaining balance, even if that causes the account to become overdrawn.

Both payday loans and deposit advances charge fixed fees that are usually much more expensive than many other forms of credit. A typical two-week payday loan with a $15 fee for every $100 borrowed equates to an annual percentage rate (APR) of almost 400%.

9. What does it mean to renew or roll over a payday loan?

Answer: Generally, renewing or rolling over a payday loan means you pay a fee to delay paying back the loan. This fee does not reduce the amount you owe. You will still owe the principal and fees for the rollover.

Some payday lenders give borrowers the option to renew or rollover their loans if they cannot afford to pay off the loan when it’s due. However, many states limit or ban these renewals or rollovers.

If your loan is renewed or rolled over instead of being repaid in full on its due date, you are paying a fee to extend the loan due date. Renewing by paying just the fees does not reduce the principal amount you owe.

For example, on a typical payday loan, if you borrowed $300, you may owe $345 in 14 days– $300 plus the $45 fee. If you roll over the loan, you pay only the $45 fee, and you have to repay the $300 plus another $45 fee 14 days later. That means the cost of the original $300 loan, due to the rollover, has gone from $45 to $90. If you roll over the loan multiple times, it’s possible to pay several hundred dollars in fees and still owe the amount you borrowed.

10. I was asked to sign an “ACH authorization” to allow electronic access to my account in order to repay a payday loan. What is that?

Answer: An Automated Clearing House (ACH) authorization is a payment authorization that gives the lender permission to electronically take money from your bank, credit union, or prepaid card account when your payment is due. You can revoke this authorization.

What you should know

  • Consumers usually are asked to provide the payment authorization as part of the process of getting the loan. The authorization will be in your loan document and it may have a place for you to initial as approved. If you approve, the lender will take your payments directly from your account without any further action by you. You may choose to refuse the authorization.
  • There are a variety of payment options for payday lenders to obtain repayment. Some lenders frequently obtain multiple types of authorizations, such as taking a post-dated check along with the consumer’s debit card information.
  • Under federal law lenders cannot condition a payday loan on obtaining an authorization from the consumer for ‘‘preauthorized’’ (recurring) electronic fund transfers.

Before you agree or sign

  • Read your loan documents carefully before signing them.
  • Make sure that the “ACH authorization” states clearly how it can be stopped or revoked. You should not sign an ACH authorization that does not say clearly how you can stop or revoke it. If you have signed an authorization that does not contain instructions on how to revoke it, you could still revoke the authorization by contacting the lender, bank or credit union, or both.
  • Know exactly how much will be deducted from your account and when. Make sure you understand:
    • How much would be withdrawn from your account
    • Whether it’s the full amount you borrowed, or a renewal or rollover fee that does not pay off the full amount borrowed and your loan is renewed automatically
    • When the withdrawal would occur

If you have problems with a payment authorization, such as the ACH was unauthorized or revoked, you may want to contact your state regulator  or state attorney general. You can also submit a complaint to the CFPB at consumerfinance.gov/complaint or (855) 411-2372.