Last updated Oct. 20, 2018.
You’ve probably seen ads exclaiming that you can “Get Money Now!” with “No Credit Check!” The ads usually have pictures of smiling families in front of idyllic suburban homes. What the companies running those ads offer, unfortunately, won’t leave you smiling. They’re offering payday loans with high fees and interest that can leave you worse off than before.
Even California payday loans, which are heavily regulated, can keep you struggling in debt indefinitely.
Payday lending is a $40 billion dollar industry. At its best, such lending takes advantage of borrowers who don’t have cash or access to credit. At its worst, it’s a scam.
Article at a Glance
- Payday loans always charge exorbitant fees, and if you fall behind on payments, they charge you sky-high interest rates that can make it very difficult to catch up.
- Online payday loan companies are often just scams, but even legitimate ones may charge you rates that are illegal under California law.
- If you need cash, you have better options than taking out a payday loan.
The Payday Loan Trap
The ads make payday loans seem simple: You pay a fee, you get the cash, and you repay it with your next paycheck. You either leave a postdated check or your checking information with the lender, so the lender deals with the collection. When your loan’s term (generally one month or less) expires, the payday lender cashes your postdated check or pulls the money directly from your checking account.
But that process hides a trap: If your account doesn’t hold enough to repay the loan, you’ll start racking up interest charges and fees. The upfront fees alone generally work out to interest rates of 650-1000%. For reference, the maximum legal interest rate in California for a personal loan is generally 10%.
And once you start racking up interest and fees for an unpaid payday loan balance, you may never catch up.
California Payday Loans: State Regulation and How Lenders Avoid It
While some states have made payday lending illegal, California still allows a regulated form of the practice. With California payday loans, lenders can offer a loan (called a “deferred deposit transaction”) of up to $300 for a term of up to 31 days. A borrower can have only one payday loan outstanding at any given time. Interest fees for an overdue balance on California payday loans are limited to 15%, but the upfront fees can be equivalent to a rate of almost 500%.
But if you live in California and have taken out payday loans in the past, those restrictions may not sound familiar. There’s a reason for that.
How Payday Lenders Skirt California’s Limits
Have you gotten an offer for a loan of more than $300? Chances are, the lender is from another state. The Internet allows payday lenders access to borrowers across the country, so lenders in states with permissive laws can take advantage of borrowers everywhere.
Websites offering payday loans are lead generators for payday lenders across the country, but state laws only affect businesses operating in the state. That loophole, combined with the difficulty of tracking business over the Internet, makes struggling borrowers vulnerable to all sorts of illicit payday loan activities.
You’ll see pop-up and banner ads offering immediate cash and easy applications. You rarely have to include any material information about yourself beyond your name and your checking account information. The lender won’t do a credit check, which is how they hook borrowers who are struggling with debt.
That may sound nice, but those lenders may disregard the law about interest rates, loan amounts, and fees, taking advantage of consumers who are unfamiliar with their rights under California law.
Payday Lending Scams
Payday lending is bad enough when it’s working like it’s supposed to. Now consider the rise of payday lending scams. Those websites and online ads you see offering payday loans may look like standard offers: You pay an upfront fee with additional fees and interest if you don’t repay the loan in full and on time.
But then the purported payday lenders take your fees and disappear into the night.
You never get your loan. Now a stranger has your bank account information. The lender will continue to draw from your account until it’s empty.
How Banks Power the Payday Loan Industry
Banks only offer traditional personal loans and they’re carefully regulated by both state and local law. They’re also bound by underwriting guidelines about whom they can lend to and for how much. Banks check your credit score for a reason when you apply for a loan – they want to know how likely it is that you’ll repay the loan.
With the recession driving consumers into financial difficulty, many consumers’ scores are still too low to get traditional bank loans when they can’t make ends meet. For that reason, some argue that banks are driving consumers into payday lending by refusing small loans to borrowers with bad credit.
But that’s is not the crucial link between banks and payday lenders. The real key is the Automated Clearing House (ACH) system. It handles direct deposits of paychecks and automatic online bill payment. It’s an important system – it makes sure your paycheck ends up in your account and that your electric bill always gets paid.
However, banks allow payday lenders to take their fees from consumers’ accounts using the ACH system, even if the payday loans in question are scams. The automation that makes the ACH so useful is dangerous to consumers who have given out their bank account information to bad actors.
How Can Predatory California Payday Loans Be Stopped?
Because of how abusive payday lenders have been in the past, several efforts are now underway to further regulate them or hold them accountable for their ill-gotten gains.
First, some borrowers are bringing suit against payday lenders. But that tactic has some flaws. Lawsuits are expensive and take time, which consumers who take out payday loans probably don’t have. And scam payday lenders often use temporary websites and route the transactions through intermediaries, making it very difficult to track down the culprit at all.
So, lawmakers and regulators are also stepping into the fight, pressuring both payday lending as a practice and banks as the facilitators of abuse. Likely, this will be the only way such practices can be reined in.
Alternatives to California Payday Loans
If you’ve tried and failed to get a loan from your bank or credit union, you still have better options than California payday loans. You can reach out to family and friends for a small loan. Speak to your employer about an advance.
Your credit card provider may offer cash advances – they have high interest rates, but nowhere near as high as those of payday lenders. Cash advances have an additional advantage over payday loans – they’re highly regulated and you’ll have the full protection of the law. (But be careful—cash advances are often as big a mistake as payday loans.)
If none of these options works for you, there are various government programs that can help you with a temporary cash shortage. Check out the California Department of Social Services website for a list of cash assistance programs.
You need cash, not a hassle. Payday loans aren’t the way to deal with financial difficulty. They won’t help you out of debt – they’ll just push you farther into it.
If you have California payday loan debt or have been the victim of a payday loan scam, contact our experienced attorneys to learn your rights and options. You may also qualify for free legal assistance from the state or through a nonprofit.