The Division of Banks cautions consumers who seek payday loans. While payday loans may be presented as an easy option to get money quickly, it is important consumers understand the high risks associated with applying for a payday loan and know what alternatives are available.
- What is a Payday Loan?
- Risks to Consumers
- Are Payday Loans Permissible in Massachusetts?
- Alternatives to Payday Loans
- State Actions Against Payday Lenders
What is a Payday Loan?
Payday loans are short-term, small-sum, high-rate, unsecured personal loans that utilize a consumer's checking account (usually through electronic access but sometimes actual checks) for repayment of the amount borrowed. These are also referred to as cash advance loans, check advance loans, post-dated check loans, or deferred deposit loans. Since these loans are short-term in nature, the cost of payday loans to the consumer is enormously high, typically averaging annual percentage rates of over 500%. The cost many times exceeds the original loan amount borrowed.
In exchange for a loan, a borrower provides the lender with an authorization to automatically debit his or her bank account. Repayment of the full amount, along with any fees required by the lender, is typically due within 14 days or with the borrower's next paycheck. If a borrower does not have the ability to repay the full amount within the required time frame, he or she can roll over the loan for an additional period of time for an additional fee.
Risks to Consumers
Payday lenders are not only very costly but they are often internet-based and require access to a consumer's bank account and personal information. Many internet-based payday lenders provide little or no identifying information about themselves. They may operate under several names while utilizing multiple domain names. With transactions completed over the internet or phone, often e-mail addresses and toll free telephone numbers are the only means of contacting these companies. Without information relative to where the company is physically located, it will likely be impossible to track down the company. Due to the nature of these lenders operating over the internet and across the globe, they are difficult to track and verify, consequently increasing the risk of identity theft for consumers.
Are Payday Loans Permissible in Massachusetts?
Payday lending is not specifically prohibited in Massachusetts but what is generally referred to as a "payday loan" is illegal due to the high annual percentage rate charged. Statutory licensing provisions require entities that wish to engage in such small-dollar lending in Massachusetts to obtain a small-loan license from the Division. The Division of Banks (Division) requires that any business engaged in making loans in the amount of $6,000 or less at an interest rate greater than 12% obtain a small loan company license under Massachusetts General Laws chapter 140, section 96-114A and its implementing Regulation 209 CMR 20.00.
The small loan maximum annual rate of interest is currently capped at 23% with an annual administrative fee of $20.
In a selected opinion issued June 26, 2006, the Division clarified its regulatory authority relative to internet-based payday lenders and licensure. The opinion makes clear that a payday loan transaction takes place where the consumer physically applies for the loan, not where the payday lender is physically located. Therefore, a payday lender doing business with Massachusetts consumers is prohibited from doing business without a license.
Alternatives to Payday Loans
Payday lending is a costly alternative for short-term cash needs. Before considering a payday loan, consumers should explore other less costly alternatives including:
- Contacting their local bank or credit union which provides short-term loans. While there are still costs associated with these alternatives, they are typically much less than what would be paid for a payday loan. Additionally, the consumers have the ability to interact with representatives of the institution if they have questions and concerns;
- Obtaining a cash advance from a credit card. Although this is generally a costly way to borrow money, it is still less costly than payday lending;
- Asking your employer for an advance on your paycheck;
- Finding out if you can delay paying a non-interest bill such as a utility bill and make payment arrangements with the utility company;
- Asking your creditor for more time to pay your bills or for a modification to your terms and what they will charge for this service - a late charge, an additional finance charge or a higher interest rate, or;
- Contacting an accredited consumer credit counseling agency in your area such as Consumer Credit Counseling Service at (800) 388-2227 or American Consumer Credit Counseling at (800) 769-3571. The counselor can advise you how to get out of debt and avoid predatory loans.
State Actions against Payday Lenders
In a series of initiatives against payday lending, the Division issued cease activity orders to hundreds of payday lending companies:
- August 18, 2009 - Division of Banks Orders Internet Payday Lenders to Cease Activity in Massachusetts
- February 09, 2005 - State Moves To Stamp-Out Internet Payday Lending During National Consumer Protection Week
In addition, the Massachusetts Attorney General prohibited Nationwide Cash, Paragon Funding, and FastBucks from operating as payday lender business in Massachusetts:
- October 20, 2010 - Attorney General Coakley Bars Two More Payday Lenders From Operating in the Commonwealth
- April 15, 2010 - Attorney General Coakley Bars FastBucks From Continuing its Payday Lender Business in Massachusetts
Consumers who have a complaint or concern with a payday lender may contact the Division's Consumer Hotline at 1-800-495-BANK (2265), ext. 501 or the Attorney General's Insurance and Financial Services Division at (888)-830-6277. The following links also provide information on payday lending and resources for consumers: