Payday Loans by any other Name: Still Not a Rose!

Payday loans can be dangerous forms of credit. Interest rates are astronomically high (according to an FDIC advisory, between 300 and 1000 percent when calculated annually), a significant number of payday loan customers take out multiple loans per year, and it’s difficult to determine a legitimate company from a fly-by-night business front. Many customers get trapped in a never ending cycle. By the time the loan comes due on the next payday (along with an additional $1.50 to $2 for every $10 borrowed), the customer can’t afford to repay the loan and pay his current bills. He then takes out another payday loan for just a bit more.

When one loan company stops extending credit, the customer moves to the next, borrowing to pay off the first. Nothing about this sounds good or appealing, right?

As Grandpa would say...

When I was a kid, my grandfather spoke in proverbs–incomprehensible proverbs to my 7 or 8 year-old self.  He said things like “you can’t make a silk purse from a sow’s ear, or “stay away from snake oil salesmen,” or, the best of the bunch, “don’t take any wooden nickels!”  I now know that he was advising me to be careful of swindles and schemes. Good advice, even if it was just mumbo-jumbo at the time. I think if my grandfather were still alive, he’d add payday lenders to his list of cautions.

But wait! I’ve seen Goodfellas! Those kinds of interest rates can’t be legal. 

They sure can be. States regulate these kinds of businesses and create safe harbors exempting payday lenders from state usury laws–or just never have usury laws to begin with like in South Carolina where I practice. Oh, and they have some pretty good lobbyists, too, in case you hadn’t figured that out.

Hold the phone!  My bank offers this kind of loan.  It’s not fly-by-night or disreputable.

It’s true that big banks like Fifth-Third Bank, Regions Bank, U.S. Bank, and Wells Fargo are among the federally insured depository institutions jumping on the payday loan band wagon. But instead of calling it a “payday” loan, their services have names like Wells Fargo’s Direct Deposit Advance or U.S. Bank’s Checking Account Advance. (But remember: you can’t make a silk purse from a sow’s ear!)

According to a report from the Center for Responsible Lending (“CRL”), the banks justify this type of loan by indicating that their customers want this type of product and it’s to be used for emergencies only–oh, and the best news, their interest rates are only 225 to 300 percent per year.  Even the FAQ on Wells Fargo’s website discourages the loans (but Wells Fargo continues to offer them):

The Direct Deposit Advance service is an expensive form of credit. . . We do not recommend regular, repeated use of the Direct Deposit Advance service. If you find yourself in that situation, we encourage you to seek credit counseling . . . and explore other credit options.

Regardless of the name, the outcome is the same. Various reports and studies show that short-term, high interest rate loans lead many consumers down the road to perdition. According to the same CRL report noted above, 12 million Americans are now trapped in the cycle of payday loans.

Can I discharge the loans in my bankruptcy?

Yes!  Typically, payday loans can be discharged in your Chapter 7 or 13 bankruptcy.  But it just makes good sense to stay away from this scheme of lending in the first place.  If you are one of the 12 million caught in a cycle of misery with these loans, remember, as Grandpa said, “it’s always darkest before the dawn.” Consult a reputable bankruptcy attorney.  It’s what Grandpa would tell you to do. He’d probably also tell you that a payday loan by any other name is just a payday loan!