Recently I wrote about payday loans and the sensationalist media coverage the industry as a whole generally receives. One of the articles I cited was by the New York Times, but they aren't the only source fueling widespread ignorance concerning this type of short term finance. There are articles and websites all over the internet citing incorrect fact, and even outright lie.
Thankfully there is an organization right here in Alexandria that works not only to help Virginians who might need payday loan assistance, but also to present the truth about these loans. They are the Community Financial Services Association of America, and for 14 years they have been helping consumers and making sure lenders follow the law.
This is because not all lenders observe the law. What most consumers are not aware of, however, is that lenders who violate the law can in certain cases forfeit their right to collect funds from a consumer. So pay attention to the laws, make sure your lender is compliant, and if you anticipate problems repaying the loan in a timely manner, contact the Community Financial Services Association before you are in default or late.
While payday loans certainly aren't the best financial option available, they are far from the worst in meeting short term financial needs. In fact, because payday lenders in Virginia are state regulated businesses that create jobs and pay taxes, they are also subject to strict rules governing their lending and collection policies. Despite what many members of the media would like you to believe, there are very strict limits to the terms and fees they can demand.
Unlike a pawn shop, which can continue to renew lender fees on customer property indefinitely, the state of Virginia sets strict limits on loans. What most people fail to realize is that the APR often listed is calculated over a year, when the loans are generally not allow to be renewed, and further are limited to a term of two weeks in many cases.
Therefore the APR is factually incorrect, as it is illegal to collect or charge anything even close to that amount. As listed in the following chart, the payday loan regulations for Virginia clearly set the repayment amount at 15%, which is actually lower than many credit cards.
The confusion and misrepresentation by the media is perhaps most easily explained by looking at the regulations in the state of Wyoming, as they are one of the most simple and direct in the industry. In that state, loans are limited to not more than 30 days, and a fee not to exceed the greater of $30, or 20% of the loan amount. They also can't be extended.
Therefore the repayment amount for a $100 loan would never be more than $130, whether that loan was for 14 days or 30 days. Since the APR is calculated off 14 days, it comes out to a whopping 780% on paper. However, as explained above, it's impossible for a consumer to ever legally pay that amount because loans can not be extended. This makes the APR of 780% an impossibly unrealistic figure that is just used for sensationalist journalism.
The laws in Virginia operate in much the same way, although they are a little bit more complicated. Hopefully this dispels a bit of the confusion over payday loans. In almost every legal case it is practically impossible to reach the astronomical APR figures cited.
The only lenders actually collecting on those figures are breaking the law. While I don’t personally recommend payday loans, I do advocate knowing your rights, and keeping in touch with those agencies who can help you if you find yourself in a position to need this type of short term financing.