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The typical Payday Loan is a high cost, small dollar loan to be paid back completely in one month to two weeks. These loans are used primarily for utilities, rent, car payments and other such recurring expenses. Borrowers usually obtain payday loans by visiting the store and giving a valid photo identification, access and proof of a bank account along with a proof of employment.

In most payday loans, the borrowers permit the lenders to debit their account electronically for the desired loan amount plus the fee. If the borrower is unable to pay back the loan by the time or rollover the loan (repaying the fee in return of extra time for paying back the loan), the payday loan lender, debit’s the borrower’s account automatically.

Payday loans are quite expensive due to the high fees charged by the lender. In the state of Texas the borrowers are paying a fee of approximately $22 against every $100 borrowed, such high fee results in an APR or annual percentage rate of approximately 574% for a 2 week loan. Since the loan fees is so high, a large number of borrowers are unable to afford the fees and fail to repay the entire principal at once which results in them paying additional fees in order to buy more time. Unfortunately by paying this fee the borrower is unable to reduce the principal amount.

 

Is it legal to have an Annual Percentage Rates (APRs) of 500%?

Usury Protections placed in the Texas Constitution restricts the lenders from charging an interest rate of 10% and above unless the Texas legislature authorizes a higher rate. Most payday lenders have found a way around this by exploiting a legal loophole. These businesses have a started registering themselves as CABs or Credit Access Businesses under the CSO or Credit Services Organization Act and broker loans between a third party lender and the borrower, while charging the borrower a high fee for guaranteeing and arranging these loans. The third party lenders continue to charge an interest rate of below 10% to avoid prosecution under the Texas Law. The Fee charged by the CAB is completely unregulated and hence the APRs end up above 500%.

 

An ordinance introduced in the city of San Antonio payday advance in the year 2013 brought the following changes to the payday lending practices:

  • Credit Access Businesses have to annually obtain a valid registration certificate from the City of San Antonio.
  • Payday Loan amounts has been limited to 20% of the borrower’s monthly income.
  • The loans repayment is limited to not more than 4 instalments or 3 renewals or rollovers (a rollover is an extension of the consumer credit made within a week of the previous credit extension)
  • The proceeds from every renewal or instalment must reduce the principal loan amount by 25%.
  • Every contract must be written in a language that the borrower can understand.
  • The lender has to provide the borrower with a form that has been created by the city which references some not for profit agencies providing financial education and some agencies providing cash assistance programs along with general information related to consumer credit extension.

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