Payday loan businesses offer short-term cash advances, often with high interest rates, and expect re-payment on your next pay day. It’s not a new model, but one that many experts say is designed to take advantage of people in dire financial circumstances.
These days though, you don’t even have to leave the house to get a loan like this. A number of mobile apps have popped up in recent years to offer payday loans right on your phone.
Cora Lewis, business reporter for the Associated Press, spoke to the Texas Standard about the impact of these apps, and how they’re regulated. Listen to the interview above or read the transcript below.
This transcript has been edited lightly for clarity:
Texas Standard: From a user’s perspective, exactly how do these apps work? What’s the process?
Cora Lewis: So typically what happens is a consumer will need some cash in between paydays, and they’ll see an ad for one of these apps. They’ll download it. They’ll agree to any flat fees, maybe pay it out, and then they’ll be extended a short term loan of some cash before payday. And then when payday rolls around, those apps will debit the borrowed money along with any fees out of their wages.
Wow. Is there any collateral involved or anything like that? Or you put down a debit card or how does it work?
Yeah, you usually either give your bank account and link that directly, or some of them are integrated into payroll through different employers. So there’s the direct-to-consumer model and the employer-provided model.
Is there much regulation here?
These apps really exist in a legal gray area right now.
So the industry is arguing that the Truth in Lending Act, which applies to traditional credit, shouldn’t apply to these apps – arguing that they’re cash advances and not loans. But some states, including Connecticut, had said that the existing usury laws should apply.
And so anything that has an interest rate or an APR above, I believe in Connecticut, something like 36%, should be disallowed.
There are different usury rates around the country. I know you interviewed a number of people who regularly use these apps. What do they tell you about the pros and cons?
So the apps are very convenient. They’re right there on your phone, so you don’t have to go to a payday lender or have an auto title loan where your car could be at risk of being taken.
And they also don’t do credit checks the way that other forms of credit do. And compared to a payday loan, you may not encounter a balloon payment, or other higher rates.
The cons?
So a lot of users end up taking out as many as 36 loans a year, according to a study from the state of California. Because once you get used to having that money, your paycheck has a hole in it the following week or two weeks. And so to plug that hole, you might take out another loan. So they can really get trapped in these cycles of borrowing.
But what about the fees and the interest rates? How do they compare with what you might find at one of these brick and mortar payday loan businesses?
So the apps, again, the companies will say that they charge flat fees of a couple of dollars that are comparable to ATM fees or cheaper than overdraft fees, which can be as high as $25 or $36 if you overdraw your account. But if you annualize those rates or you factor in the monthly subscription fees that some of them charge, they can really add up.
And because most of these loans are for small amounts of money, as little as $100 or $250, if you do annualize those fees, they do come out to interest rates of over 300%, which is comparable to payday lending.
That is comparable to what you see in the brick mortars. What did you hear about the potential future of these apps? You mentioned that there’s a sort of legal limbo around some of these apps. Will they be able to carry on indefinitely, or are regulators looking at this in several states?
Regulators are definitely looking at this in California and Hawaii in particular. They’re drafting laws that are similar to Connecticut that will classify these apps as loans, and so really cap those fees and interest rates at the federal level.
A law has been drafted by a conservative-leaning think tank, ALEC, the American Legislative Exchange Council, that would exclude the apps from being regulated by the Truth in Lending Act, which means they could continue to operate as they are now. So I guess the next couple of years are going to be pretty pivotal.
