Many Iowans, including elderly Iowans, are relying on “Payday” loans to help make ends meet. (Sometimes these loans are called “Cash Advance Loans”, “Check Advance Loans”or “Delayed Deposit Checks”) Lenders make these loans to people who need cash before payday (or social security deposit day) to pay rent, buy food or meet some other need. Unfortunately, many Iowans are not aware of the cost of a Payday loan. As one person put it, “It can be like working 5 days, but only getting paid for 4!”
In a Payday loan, the lender gives you cash. In exchange, you give the lender a personal check or permission to automatically withdraw money from your bank account. The lender gets to cash your check or withdraw funds from your bank at some future date, usually your next payday.
The problem with Payday loans is their high cost. The cash you receive from the lender is usually a lot less than the amount of the check or the withdrawal. For example, a lender may give you $200 in cash in exchange for your $225 check that the lender will cash in two weeks. In this case, the interest and charges would be $25 and the annual rate of interest would be a shocking 325%! This is an interest rate that few can afford, especially lower income Iowans who live from one paycheck or social security check to the next. Here is another example: if you got a $200 Payday loan every 2 weeks, you would pay $650 in interest and fees over a one year period. If you instead borrowed $200 from a bank at 12% for the same one year period, you would only pay $24 in interest!
Iowa law places limits on fees that may be charged on payday loans. In addition, both state and federal law require the lender’s charges, including the Annual Percentage Rate, to be clearly disclosed. Thus, in the example above, you would have to be informed in writing that the interest rate was a whopping 325% on an annual basis. These disclosure laws help Iowans better understand just how expensive “Payday” loans really are.
If you have emergency cash needs, you can save by working with a local credit union or community bank. Many banks and credit unions have small loan or overdraft protection services to help with short term money needs. You can also try talking with your creditor or landlord to try to work out a payment plan or other arrangement.
If you have questions concerning these or other legal issues involving Iowans over 60, please contact the Legal Hotline for Older Iowans.