Payday Loan - Know Your Rights and Decide If One Is Right for You
The Attorney General provides Consumer Alerts to inform the public of unfair, misleading, or deceptive business practices, and to provide information and guidance on other issues of concern. Consumer Alerts are not legal advice, legal authority, or a binding legal opinion from the Department of Attorney General.
KNOW YOUR RIGHTS AND DECIDE IF ONE IS RIGHT FOR YOU
What is a "payday loan?"
Payday loan, cash advance, or check advance loan are commonly used phrases to describe what Michigan law refers to as a "deferred presentment service transaction." For the purposes of this Consumer Alert, we will refer to deferred presentment service transactions as "payday loans." One who is licensed in the State of Michigan to offer a payday loan is a licensee, but for the purposes of this Consumer Alert, we will call the licensee a "payday lender."
The payday loan transaction is a small, short-term, high-cost arrangement where the customer gives the payday lender a check to cover the payday loan amount and service fees. In return, the payday lender provides the customer with immediate cash, check, or money order, depending on the needs of the customer. Typically, payment is made from the customer's next paycheck. To qualify, the customer usually only needs personal identification, a checking account, and proof of anticipated income from a job or governmental benefits.
Payday loan disadvantages
Very high service fees, combined with a short repayment period, may cause customers to fall into a payday loan debt trap. Instead of short-term financial relief, the customer experiences perpetual indebtedness.
How payday loans work in Michigan
In Michigan, the Deferred Presentment Service Transaction Act governs payday loans. Customers sign a written agreement, which must include an itemization of the fees to be paid and the equivalent annual percentage rate. The agreement must also clearly describe the payment obligations and the process a customer may take to file a complaint against the payday lender.
A payday lender can only have one outstanding payday loan per customer for a loan amount of up to $600. A customer may take out a second loan with a different payday lender. A customer can only have two outstanding payday loans at any given time.
HOW MUCH AM I PAYING FOR A PAYDAY LOAN?
The limits on the service fees for payday loans are based on the amount of the loan. The payday lender may 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. Therefore, the following service fee limits apply:
Payday Loan Amount Total Service Fee Limit
$ 50 $ 7.50
Payday loans can be very expensive. For example, a customer who borrows $100 will be charged up to $15 for a two-week loan (the payday lender may provide for a shorter or longer period - up to 31 days). The customer writes a check for $115 and receives an immediate $100 in cash.
Because the payday 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 payday loan.
1. The daily interest charged ($15/14 days) is $1.071429.
2. Convert the daily interest charged into an APR: $1.071429 x 365 days in a year = 391%
While the actual cost of this two-week loan is $15, the annual percentage rate of that $15 is 391%! The payday lender may charge an additional database verification fee of 45 cents per transaction.
How DO PayDay lenders know if customers have outstanding payday loans?
The State maintains an electronic database that payday lenders must check to see if a customer has any outstanding transactions. To process a payday loan request, the payday lender will ask for the customer's name, address, Social Security number, driver's license or other state-issued I.D. number, amount of the loan sought, the number on the check that will be used to cover the payday loan, and the date of the requested payday loan. The payday lender must then check the State database to make sure a customer does not have more than one outstanding payday loan. If the customer has more than one outstanding payday loan, the payday lender cannot issue another one.
If the electronic database is ever down, each customer will be required to sign a statement indicating that he/she does not have an outstanding payday loan with the current payday lender and also indicating that the customer does not have more than one other payday loan with another payday lender in the State.
What are your rights?
The written payday loan agreement a customer signs must include the following: (Please note that a payday lender is referred to in this notice as the "licensee" or sometimes "we" or "us").
1. A deferred presentment service transaction is not intended to meet long-term financial needs. We can only defer cashing your check for up to 31 days.
2. You should use this service only to meet short-term cash needs.
3. State law prohibits us from entering into this transaction 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 effect with any other person who provides this service.
4. We must immediately give you a copy of your signed agreement.
5. We will pay the proceeds of this transaction to you by check, by money order, or in cash, as you request.
6. State law entitles you to the right to cancel this agreement and receive a refund of the fee. To do this, you must notify us and return the money you receive today by the time this office closes, tomorrow, or on our next business day, if we are not open tomorrow.
7. State law prohibits us from renewing this agreement for a fee. You have to pay an agreement in full before obtaining additional money from us.
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