FAQ's:  Separating the Fact from Fiction

In their latest legislative efforts, payday lenders claim that their proposal will provide needed protections for struggling borrowers, when in fact it will do the opposite by authorizing predatory lending. 

The following provides the reality behind the claims made by payday lenders.  

Myth: PA needs a law to regulate abusive internet loans. 
REALITY: Pennsylvania law has successfully stopped abusive Internet payday loans for years.  Loans made over the Internet in violation of current law are void and unenforceable.  In 2010, the Pennsylvania’s Supreme Court unanimously held that the loans made by Texas-based Cash America over the Internet to Pennsylvanians were illegal because they carried charges ranging from 260% to over 600% APR.  In other words, Internet loans are already highly and effectively regulated in our state.    

Myth: Internet payday loans are widespread & out of control. REALITY:  Credit counselors, social service agencies, churches, and others in Pennsylvania report that they rarely, if ever, see people trapped in an illegal Internet loan. In the rare case they do, it's easy to resolve because the loan is void and unenforceable.  These experiences match the findings of a new study Pew Charitable Trust, in which it found that the absence of storefront payday lenders does not drive borrowers turning to seek payday loans online or elsewhere.

Myth: APR doesn't matter for payday loans.  
REALITY:  APR (annual percentage rate) does matter for payday loans, and in fact it is required by federal Truth in Lending Act. Federal law requires all forms of credit, including payday loans, to disclose the cost of credit as an APR. It allows borrowers to make apples-to-apples comparison of loan costs, regardless if it's a two-week loan, two-month loan, or two-year loan. Further, payday lenders use the APR on their own websites in advertising their products.  

Myth: Payday loans are better than bounced check and overdraft fees.  
REALITY:  Payday loans increase the burden of overdraft and bounced check fees because the loan is secured by access to the borrower's bank account.  According to their own reports, payday lenders collect millions of dollars in bounced check fees from their own customers every year. And research has shown that payday lending increases the odds that households ultimately lose their bank accounts due to repeated overdrafts.

 

Myth: Payday loans are safe, cheap short-term loans.  
REALITY: Payday loans are a long-term debt trap that would deepen Pennsylvanian's financial stress, not solve it. The typical payday borrower is indebted for about 200 days a year.  And, payday loans put borrowers in a worse financial position than when they started - increasing likelihood of bankruptcy, delinquency on other bills, delay of medical care, and other harms.   

Myth: Low-income borrowers have no other options. 
REALITY: Financially-strapped families have a range of options other than 300% APR two-week payday loans to manage a budget gap. In their recent study, Pew Charitable Trust, found that 80% of borrowers would choose to cut back on their expenses in the absence of payday loans. Other options reported by borrowers include borrowing from families and friends, selling or pawning possessions, borrowing from a bank or credit union, or delaying other expenses. In the absence of payday loans, borrowers are able to get their financial house in order rather than being stuck in a repetitive cycle of high-cost debt.  

Myth: Provisions like extended repayment plans, rollover bans, and databases stop the debt trap.
REALITY: Research from the U.S. Department of Defense and experience of other states show that these provisions do not address the harms of the core predatory terms of the payday loan product. The U.S. Department of Defense noted that databases, rollover bans, mandatory loan limits and others are merely "bells and whistles" that do not lessen the harm of repeat borrowing caused by the design of the loans.  In these states, the Department noted the "debt trap is the rule, not the exception." These findings led to a 36% annual rate cap on fees and interest for payday loans made to active duty military families.