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In this economy, many Minnesotans may find themselves financially squeezed and looking for short-term help. Some cash-strapped consumers may turn to payday loans.

A payday loan is a short-term, high-interest loan, targeted at borrowers who need money between paychecks. The contract generally requires the borrower to pay back the loan in 14 days, when their next paycheck arrives. Consumers should beware of the costs and fees associated with such loans. Consumers should also be wary of who they are borrowing from, as some payday lenders do not follow Minnesota law and charge rates of interest far greater than those allowed in Minnesota.

What is a Payday Loan?

Payday loans are short-term loans, often for $500 or less, with hefty finance charges. Payday loans allow consumers to borrow against an anticipated paycheck or other anticipated earnings. Although payday loans may be marketed as “one-time-only” loans designed to help the consumer get by until their next paycheck, some consumers who take out payday loans find themselves trapped in a downward spiral of debt as they take out a series of loans, one after another, accruing greater and greater finance charges that can quickly exceed the amount borrowed.

Internet Payday Loans Especially Problematic

The current economy has led many people to look for instant payday loans on the Internet. People should be on guard against Internet payday lenders that evade state interest rate and consumer protection laws by operating online without proper state licensure. Numerous payday loan websites operate on the Internet. A customer generally types in their personal information, including their Social Security and bank account numbers, and the loan is deposited into their bank account within hours. If the loan is not repaid on time (generally within two weeks) hefty finance charges are automatically debited from the consumer’s bank account every two weeks. The borrower can soon incur interest that exceeds the amount of the loan.

Some Internet payday lenders try to evade state interest rate and consumer protection laws by getting licenses in states without meaningful restrictions, by operating without state licenses at all, or by setting up operations outside of the country and claiming that loans are made subject to the laws of the home country. Minnesota law, however, makes clear that online payday lenders that lend money to Minnesota borrowers are subject to the requirements of Minnesota law even if the lender is physically located in another state.

People should always check—before they sign up— to find out if an Internet payday lender is registered with the Minnesota Department of Commerce to make small consumer loans in Minnesota. Some consumers encounter legal problems when they dispute the amount owed under an Internet loan contract. Also, consumers who borrow online often have difficulty communicating with Internet payday lenders, who are hard to locate to resolve disputes. Be wary about giving out information online to unknown Internet companies. This can expose you to potential privacy and identity theft risks, and a disreputable Internet company can use your bank account information to drain your account.

High Fees and Costs

Although the quick cash promised by payday loans may sound attractive, consumers should make sure that they know what costs they are agreeing to pay before signing up for such loans. Minnesota law caps the amount of fees that can be charged on payday loans. If a payday loan is less than $350, Minnesota rates are capped on a sliding scale as follows:

LOAN AMOUNT

FEE

$0 - $50

$5.50

$50 - $100

10%, plus a $5 fee

$100 - $250

7% (minimum of $10), plus a $5 fee

$250 -$350

6% (minimum $17.50), plus a $5 fee

For loans between $350 and $1, 000, payday lenders cannot charge more than 33% annual interest plus a $25 fee. Minnesotans should not obtain payday loans that do not meet these fee caps. This requires vigilance on the part of consumers, as some Internet payday lenders do not comply with Minnesota law.

Payday Lenders Must be Licensed With the State

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