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Know Your Payday Loan Rights

The Attorney General provides Client Warnings to educate consumers of unfair, misleading, or deceptive business activities, and to provide facts and guidance on other issues of concern. This guide is based on Michigan law and regulations, but quite similar laws are present in other American states.

What is a "cash advance loan?"

Payday loan, cash loan, or check advance loan are usually used terms to describe what Michigan law describes as a "deferred presentment service transaction". For the purposes of this Customer Caution, we'll refer to deferred presentment service transactions as payday loans. One who's licensed in the United States to offer a payday loan is actually a licensee, but for the purpose of this Customer Warning, we will call the licensee a payday lender.

The pay day loan transaction is a compact, short-term, high-cost arrangement in which the consumer gives the loan lender a cheque to cover the pay day loan sum as well as service charges. In return, the pay day lender provides the consumer with instant cash, check, or money order, based on the wishes of the client. Typically, payment is made from the consumer's next paycheck. To meet the requirements, the client usually simply needs personal identification, a banking account, and proof of expected income from a job or government benefits.

Payday loan downsides

Very high service fees, along with a short payment term, could cause clients to fall into a cash loan debt trap. Instead of short-term money assistance, the individual endures continuous indebtedness.

How cash loans work in Michigan

In Michigan, the Deferred Presentment Service Transaction Act controls payday loans. Consumers sign a written agreement, which ought to include an itemization of the fees to be paid and the equivalent annual percentage rate. The arrangement should also precisely discuss the repayment responsibilities as well as the procedure a consumer could take to file a complaint against the pay day company.

A pay day lender may only have one outstanding payday loan for each client for a payday loan amount of anywhere up to $600. A consumer may take out a second loan with a different pay day company. A customer may only possess two outstanding payday loans at any given moment.

Exactly how much am I paying for a payday loan?

The limits on the service rates for payday loans depend on the sum of the loan. The loan provider can charge up to 15% on the first $100, 14% on the second $100, 13% on the third $100, 12% on the fourth $100, and 11% on the fifth and sixth $100. So, the following service charge restrictions apply:

Payday Loan Total Total Service Fee Limitation
$50 $7.50
$100 $15
$250 $35.50
$200 $29
$300 $42
$400 $54
$475 $62.25
$500 $65
$600 $76

Payday loans can be very expensive. As an illustration, a client who gets $100 shall be charged up to $15 for a two-week loan (the payday lender may offer a longer or shorter period - up to 31 days). The consumer writes a check for $115 and gets an instant $100 in cash.

As the pay day loan is short-term, the service fee translates into a triple-digit annual percentage rate (APR). The following illustrates the calculation of the APR on this cash loan.

1. The daily interest charged ($15/14 days) is $1.071429.

2. Convert the daily interest incurred to an APR: $1.071429 x 365 days in a year = 391%

Although the actual cost of this two-week loan is $15, the APR of that $15 is 391%! The payday provider may impose an extra database verification fee of 45 cents per contract.

How do payday providers determine if people have outstanding payday loans?

The State maintains a digital database that payday lenders need to inspect to find out if a consumer has any outstanding transactions. To process a payday loan request, the loan lender will ask for the customer's name, home address, SSN, driving license or any other state-issued ID number, amount of the loan searched for, the number on the cheque that is going to be used to cover the payday advance, as well as the date of the requested cash advance. The payday loan provider has to then look into the State database to make sure a client doesn't have more than one outstanding payday loan. When the individual has more than one outstanding cash advance, the payday creditor cannot issue another one.

If the digital database is ever down, each consumer is going to be expected to sign a statement specifying that he/she doesn't have an outstanding cash advance with the current payday creditor as well as specifying that the individual does not have more than one additional payday loan with a different pay day provider within the State.

What are your rights?

The written payday loan contract a customer signs must involve the following: (Take note that a payday lender is referred to in this notice as the "licensee" or occasionally "we" or "us").

1. A deferred presentment service transaction isn't meant to deal with long-term financial needs. We can just defer cashing your check for up to 31 days.

2. You should use this particular service only to cover short-term money needs.

3. State law prohibits us from getting into this deal with you if you already have a deferred presentment service agreement in effect with us or have more than one deferred presentment service agreement in place with some other individual who supplies this service.

4. We should quickly supply you with a duplicate of your signed deal.

5. We'll pay the proceeds of this deal to you by check, by money order, or in cash, as you require.

6. State law entitles you to the right to terminate this contract and receive a refund of the fee. To do this, you should notify us and return the funds you receive today by the time this office closes, tomorrow, or on our next business day, if we're not open tomorrow.

7. State law prohibits us from renewing this deal for a fee. You should pay an agreement in full prior to acquiring more money from us.

8. State law prohibits us from utilizing any sort of criminal process to collect on this arrangement.

9. State law entitles you to details regarding filing a complaint against us, if you feel that we have violated the law.

10. In case you are not able to pay your deferred presentment service transaction and also have applied for 8 deferred presentment service transactions with any licensee in any 12-month time period, state law entitles you to ask for a repayment of that deal in installments. We have to advise you of this opportunity at the time it's available. In case you elect this approach, you need to inform us, either orally or in writing, within 1 month after the maturity date of the deferred presentment transaction. The notice needs to be presented to us at our office. You can be charged an extra fee when the transaction is rescheduled in installments. You will be ineligible to enter into a deferred presentment service transaction with any sort of licensee throughout the term of the repayment plan.