State: New law limits payday loan charges

CHICAGO—Illinois Attorney General Lisa Madigan reminds Illinois consumers looking for extra cash to finance their holiday spending that a new law, effective Dec. 6, protects consumers from the outrageous finance charges and interest rates previously associated with payday loans.

“During the holidays, many consumers turn to payday loans to help make it through,” Madigan said. “The Payday Loan Reform Act of 2005 includes new restrictions to ensure that payday loans are truly short-term loans, and don’t catch people in a vicious cycle of debt.”

Madigan, whose office helped draft the Payday Loan Reform Act of 2005, said shoppers looking to borrow extra money to pay for holiday gifts are protected by the new law, which includes a repayment plan option that stops the interest clock from ticking after 37 days of continuous debt. The new law will save Illinois consumers an estimated $45 million a year in fees that they are currently paying for this very expensive form of short-term credit, Madigan said.

While payday loans remain among the most expensive form of short-term credit, consumer protections provided by the Payday Loan Reform Act of 2005 work together to limit how much and how long a consumer can be in debt. The following are the law’s key provisions, which apply to every payday loan issued on or after Dec. 6, 2005.

A lender may charge a fee of no more than $15.50 for every $100 loaned;

If a consumer repays his or her loan within two days, the lender must return the consumer’s check, with the lending fee;

A lender cannot make a payday loan if the loan would result in the consumer being in payday loan debt for more than 45 consecutive days;

A lender cannot make a payday loan to a consumer who has an outstanding balance on two payday loans;

A borrower cannot borrow more than $1,000 or 25 percent of his or her gross monthly income, whichever is less;

When a consumer pays off the balance of all payday loans taken out in a period of 39 or more consecutive days, a lender must wait seven days before issuing that consumer a new payday loan;

After being in payday loan debt for 35 days, a consumer is entitled to enter into a repayment plan that permits him or her to pay off any outstanding payday loans in installments, with no additional fees, interest, or charges of any kind; and

The law provides additional protections to members of the military, including: a ban on wage garnishments, deferral of collection activity for personnel deployed to a combat area, and a prohibition on contacting a consumer’s commanding officer.

To get a payday loan, a borrower must show the payday lender a pay stub and then write the lender a check for the cash loan. The check is usually made out for a later date—often one month and one day after the date of the loan. The lender gives the borrower cash in return, but for an amount less than the value of the check. The difference between the amount for which the consumer writes the check and the amount the consumer is paid in cash is the lender’s profit, or finance charge.

Most of the time, a consumer doesn’t have the funds in his or her checking account to cover the post-dated check when it is written, and may not have the funds when it comes time for the check to be cashed. When payment comes due, if consumers can’t cover the check, they are often encouraged by the payday lender to roll the overdue loan into a new loan, incurring new fees and increasing the amount of the loan.

Previously, this loan “flipping” often led to consumers using most or all of the money borrowed to pay the lender’s costly fees. However, under the new law, consumers are protected from loan “flipping” because lenders are not allowed to make a new payday loan to a consumer who has an outstanding balance on two other payday loans.

Madigan reminded consumers that some community banks, credit unions and small loan companies will make short-term loans without exorbitant fees and interest rates. These banks will make short-term loans at comparatively low interest rates, and they require little more paperwork than the payday lenders to qualify the consumer for the loan. These lenders may prove to be far more affordable for the consumer when it comes to paying back the loan.

From the Dec. 21-27, 2005, issue

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