MADIGAN, CONSUMER ADVOCATES URGE CONSUMERS
TO WATCH OUT FOR
“AVALANCHE LOANS” DURING HOLIDAYS
Chicago – With a bad economy but long gift lists, many consumers may take out heavily-advertised, high-interest payday loans, only to discover snowballing debt and a financial avalanche after the holidays are over, Attorney General Lisa Madigan warned today.
Joined by consumer advocates at a news conference, Madigan noted that payday lenders are very aware when people need cash the most, including at the holidays, when the lenders take out extra advertisements and offer extended hours.
However, what the payday lenders don’t advertise about the loans are annual percentage rates (APR) that can climb into the triple digits, the enormous cost of taking out such loans and loan terms that enable the lenders to dodge interest caps set by state law.
“Illinois consumers need to know that it’s not in their best interest to take out a loan with three-digit interest rates,” Madigan said. “These lenders make the Grinch look consumer-friendly. The bottom line is that these loans can snowball until they create an avalanche of debt for a consumer who only borrowed a small amount of money.”
A payday loan is a short-term loan obtained when a borrower writes a check dated in the future. To get a loan, a borrower must show the payday lender a pay stub and then write the lender a check. The lender gives the borrower cash in return, but for an amount less than the value of the check. The difference is the lender’s profit, or finance charge. Most of the time, the consumer doesn’t have the funds in his or her checking accounts 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. The lure of fast cash from payday loans can tempt borrowers to write bad checks, which is illegal in Illinois.
When payment comes due, if the consumer can’t cover the check they are often induced to roll the overdue loan into a new loan, incurring new fees and increasing the amount of the loan. The loan “flipping” can quickly turn into an avalanche of consumer debt.
The Office of the Attorney General has sued lenders who have threatened borrowers with criminal prosecution for writing checks that the borrowers ultimately couldn’t afford to cover.
Because there are no limitations on the interest rate on payday loans, APRs usually soar well into the triple digits and rise from there with each renewal, something consumers should be aware of and avoid. Most payday loans start out with a 241 percent APR, but if the loans are rolled over, this amount simply skyrockets. On top of this, there are no limitations on the fees that payday lenders can charge borrowers.
While the Department of Financial Institutions regulates payday loans, payday lenders have found clever ways around the rules. For example, the industry dodges the rules by writing loans for 31 days or more, when the loans covered by state regulations have a 30-day limit on the loan term.
In the last legislative session, a number of bills were introduced aimed at the regulation of high cost payday loans. The primary issues revolved around caps on the interest rates and fees as well as limits on the number of times a loan can be renewed, or flipped. The Monsignor John Egan Campaign for Payday Loan Reform backed the Illinois Affordable Loan Act, which limits the APR on payday loans to 36 percent and restricts the number of loan roll overs to two per loan.
Madigan today offered tips to consumers tempted by the offers of payday loans, reminding consumers that there are some community banks that compete for consumer business by meeting their needs without making them pay 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 get the consumer qualified for the loan. These lenders will prove to be far more affordable for the consumer when it comes to paying back the loan.
Expected to join Madigan today were William McNary, co-director of Citizen Action/Illinois; leaders of the Monsignor John Egan Coalition for Payday Reform; Anne Vanderweele, legislative liaison for Metropolitan Family Services; Marie Stevens, consumer credit counselor for Metropolitan Family Services; Steve Wrone, staff attorney for the National Center on Poverty Law; and Marva Williams, senior vice-president of the Woodstock Institute.