In 2003, Elliot Clark took out five short-term loans of $500 from payday lenders in Kansas City so he could keep up with the bills his security job simply could not cover. Clark juggled the five loans for five years, paying off a $500 loan and interest using loans he took from another payday lender. Clark ultimately received disability payments from Veterans Affairs and Social Security, and he was able to repay the debt. The interest Clark paid on the original $2500: more than $50,000.
Clark is not alone. Twelve million American adults use payday loans annually. In Missouri, borrowers received 1.87 million payday loans between October 2013 and September 2014. The average loan in Missouri during this time period was $309.64, with an interest/fee of $53.67 for a 14-day loan. The resulting average interest rate was approximately 452%.
So, how do we as Missouri consumers navigate the world of payday loans and short-term lending? This post answers: (1) how does Missouri define payday loans and (2) what traps should I avoid as a consumer of such loans?
What is a payday loan?
A payday loan is an unsecured small dollar, short-term loan. The name of the loan derives from the loan period; the typical duration of a payday loan matches the borrower’s payment schedule. In Missouri, a borrower can obtain a loan for up to $500. An initial interest rate can be set for up to 75%. The loan must be repaid 14 to 31 days after the borrower receives the loan.
A borrower may “renew,” or rollover the loan for an additional 14 to 31 days. To renew a loan, a borrower must:
- Make a written request to the lender
- Pay 5% of the principal amount of the loan
- Make a payment on interest and fees due at the time of renewal
The lender can also charge up to 75% in interest rate for each renewal. A borrower in Missouri can renew the loan up to 6 times.
What traps should I, the consumer, avoid?
- Do not underestimate the extremely high interest rate: A lender can charge an interest rate of 75% on the initial loan. During each renewal period, that interest rate stays the same. As mentioned above, the average annual percentage rate for a payday loan in Missouri is 452%, and with high annual percentage rates reaching 800%.
- Do not take the full amount offered: Payday lenders will frequently attempt to persuade consumers to take the full $500 loan, when a borrower only needs a fraction of that amount. Take only the amount you need to cover the immediate expenses. The extra $100 you borrow can become over $1000 that you must pay back.
- Do not be embarrassed to ask for help in understanding the contract terms: Loan language can be confusing, especially as special terms used in loan contracts are not used in everyday language. If you do not understand what annual percentage rate, renewal, or principal are, ask the employee. Make the employee explain exactly how the loan will work – go through how much you will owe at the end of the term, how much money will be owed if renew the loan, and how much interest will be paid on each loan. It is better to understand what you contract into before you sign then to be surprised in two weeks with a larger debt than you expected.
- Do not renew a payday loan: Lenders make money by collecting on interest on renewal loans. Because Missouri allows interest rates up to 75% per renewal, your interest owed will quickly become larger than the amount you originally took out. As mentioned earlier, only take out the amount you need and can afford to pay back!
- Do not take out loans from multiple locations: While it is tempting to take out a second loan from a second lender to pay the interest off a second loan, this leads to further debt. While law does not allow this type of lending, it still occurs in Missouri payday loan practice. Like Clark, borrowers become stuck juggling multiple loans and increasing interest.
Alarmingly, the Missouri laws regulating payday loans are confusing and unclear. More terrifying is the lack of guidance Missouri consumers face in navigating the maze of payday statutes. The Missouri Attorney General’s office currently does not produce a guide to short-term loans (like it does in other areas of law, such as Landlord/Tenant). The Missouri Department of Finance provides an explanation as murky and bewildering as the statute it attempts to interpret.
Ultimately, Missouri consumers must be extremely careful when taking out payday loans. The best policy individual consumers regarding payday loans may be to simply avoid at all costs.
**I would like to recognize Michael Carney, staff attorney at Mid-Missouri Legal Services, for his help in researching and understanding the Missouri statutes applicable to payday loans.