by: Vess A. Miller, Attorney
Do you work two jobs but still can’t make ends meet? Or maybe you just lost your job and are struggling to keep the lights on, feed your family, and keep a roof over their heads? Or maybe recent medical bills or car repairs have left you without the money you need to provide the basic necessities of life for yourself and for those who depend on you?
If you answered “yes” to any of these questions and are looking for a solution, you should be aware that unscrupulous online payday lenders are waiting to take advantage of your financial situation. While lenders may portray their online payday loans as a “fast and easy” fix to your problems, these online payday loans could end up catching you in a net of debt that you cannot escape from. These lenders’ claims are as disingenuous as a shark handing its victim a life jacket for temporary safety.
While many bricks-and-mortar payday lenders are state-licensed and comply with state usury laws (usury is generally defined as lending money at an illegally high interest rate), the internet is teeming with lenders who promise immediate cash but at rates that can exceed 1000% APR on loans that automatically renew (and recharge you a high fee) every few weeks. These lenders promise that getting a loan “the next business day, without a credit check” is “quick and easy” and will prevent you from the “embarrassment” of having to ask friends or family for help. But what these lenders often don’t mention prominently is that the rates they charge may be unlawful in your state and that it may be unlawful for them to automatically renew your loans, as their contracts say they can. They fail to say that they are trapping you in a loan that could take $90 or more from every paycheck without ever reducing the amount you owe.
It is not uncommon, for example, for an online payday loan company to charge a $30 “finance fee” for every $100 it lends and to renew the loan every two weeks. These types of charges can add up quickly. Take the following example:
Customer takes out a $300 payday loan with a finance fee of $90 that renews every two weeks.
Over the course of this loan:
Customer will be charged an interest rate of over 792%.
After 6 months, Customer will have paid more than $1,000 in finance charges for the $300 loan, and still owe the loan amount.
It is not hard to see why many states prevent these loans. When a lender has access to an online borrower’s bank account, it can automatically withdraw funds every two weeks, with little recourse. In no time, that $300 cash advance turns into a $90 charge every pay period that makes a bad financial situation even worse.
Illegal Interest Has Been Prohibited for Centuries.
High-interest lenders trying to take advantage of financially-distressed people is nothing new. Usurious payday lending has been around—and illegal, condemned, and heavily regulated—for much of written human history. Religious books like the Torah, the Bible, and the Quran all prohibited usury, which was punishable by ex-communication under Medieval Canon Law. Dante condemned usurious lenders to the lowest levels of hell—below murderers.
Civil law has likewise outlawed usury for centuries, including in the Code of Hammurabi and the Code of Justinian. Medieval Roman Law fined usurious lenders 4 times the amount they lent, while robbers were fined only 2 times what they stole.
In the United States, shortly after the country was formed all states passed usury laws limiting legal interest rates to around 6%. And all states had interest rate caps from the founding through the 1970s.
In short, people have understood for much of human history that unreasonably high interest rates are harmful to individuals and communities because they force people into poverty and hopelessness when other help would have given them a chance to regain financial stability.
The Good News: In Much of the United States Payday Loans Are Illegal or Highly Regulated to Protect Consumers in Financial Distress.
The good news is that many states today effectively outlaw or regulate unreasonable payday lending through laws that limit interest rates and outlaw automatic renewals. In these states, victims of payday loan abuse may have recourse through a private class action lawsuit or by contacting their state attorney general. For example, the Indiana General Assembly has enacted laws that permit payday lending but prohibit finance fees above $15 per $100 borrowed and prohibit renewals. Cohen & Malad, LLP has been appointed class counsel in two class actions that have recovered money and cancelled payday loans for thousands of people in Indiana.
The Bad News: Unscrupulous Payday Lenders Try to Evade State Laws in Many Ways
The bad news is that many online lenders try many different ways to evade these laws. For example, a lender may include a valid arbitration clause in its loans to prohibit class actions, which cuts victims off from being able to get their day in court. A class action allows one person to sue on behalf of everyone who has also been a victim. One very valuable aspect of a class action is that a victim who may have a claim that is only worth a few hundred or few thousand dollars, which would not be enough to get a lawyer to represent her, can bring a class action where all victims claims can be combined together to make it economically practical to have a lawyer pursue the case without an upfront payment and achieve justice for many people. Cohen & Malad, LLP has had some arbitration clauses declared void so that it can represent all victims, but also sometimes is unable to represent victims if an arbitration clause cannot be overcome. If a lender can prevent its victims from combining together it can often continue its unlawful practices without fear of having to pay anything back.
Another way lenders now try to evade state laws is by claiming they are affiliated with or work from sovereign Indian nations. Lenders will sometimes claim that they are located in offshore places like the West Indies or on sovereign Indian tribal lands. Often, however, these claims are uncovered to be fronts and the real lender is in U.S. territory. Nonetheless, uncovering these fronts costs time and money.
How to Avoid Payday Loans and What to Do if You’ve Become a Victim
If you’ve become financially distressed, you should probably seek out assistance from other possible sources of financial assistance before turning to a payday loan. Local charities, civic organizations, and government may be able to help you. If you feel that you must obtain a payday loan, it is probably best to choose a physical payday loan store and to check with your state’s financial institutions department to make sure the lender you are visiting is licensed to follow your state’s laws. If you find yourself repeatedly using payday loans, you should consider seeking out advice on how to avoid using payday loans as long-term financing. In one study cited by the Consumer Federation of America, people who could not get payday loans were actually found to be in better financial condition than those who used them regularly.
Unlawful payday loans can have devastating financial effects on people who are vulnerable and financially distressed. If you have taken out an online payday loan, and if you think you might have been charged an illegal fee or been subject to illegal practices, you should consider contacting a lawyer or state officials to see if you may have possible legal options.
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