Aside from the obvious interest rates, people often associate loans with mounting fees and charges, some of which are said to be intentionally obscured. We all know that one should always read the fine print before signing on the dotted line. So, should an applicant be wary of such methods when requesting a payday loan online?
The first thing to remember is that the field of payday lending is regulated by law. In the USA, 37 states have introduced their own specific statutes allowing for payday lending. These restrict the following:
- maximum loan amounts (for instance, $1000 in Idaho, $500 in Alabama and $300 in California),
- maximum terms of payday loans (no less than 14 days in Indiana), and
- finance charges.
Most online lenders deposit borrowed amounts directly into their customers’ checking accounts, and later automatically deduct repayments through the same system. The total actual cost of borrowing is determined by the length of the loan (i.e., the term) and the rate of interest. The shorter the term – the cheaper the loan. Current regulations oblige all payday lenders to disclose the full actual cost (“annual percentage rate” abbreviated as APR). In Illinois, a borrower may not be charged more than $15.50 per $100 loaned during the term of the loan. In British Columbia, this amounts to $23. In the latter case, the maximum cost of borrowing for 14 days is just under 600% APR. This figure may look rather deterring unless you remember that the length of your loan constitutes a tiny fraction of a full year, so this percentage is never to be paid. This is what you would have paid had you borrowed for a term of 12 months, which is 26 times longer than the 14-day period! Assuming you borrow $300 at a cost of $15 per each $100, the total amount paid back after a 14-day period is $345. This means a simple interest rate of 15%. This information can be found on “Consumer Disclosure” pages of most lenders’ websites, which may also provide detailed cost calculations.
If a person fails to repay the loan on time, the lender may offer to charge service fees only and extend the due date. The borrower, therefore, ends up owning the same balance. This may be done if the state legislation permits so-called rollovers. For instance, with a $45 rollover fee for the above-mentioned loan of $300, the total sum to be paid after a single extension is $390.
Hence, the only case when additional fees are possible is when a borrower fails to fulfill their obligations. Having reviewed all terms of an offer, you are never obliged to accept it. All costs associated with borrowing online are publicly disclosed. Like any legal business, payday lending must obey the law and make its procedures transparent.