What You Should Know About Payday Loans and Title Loans

What You Should Know About Payday Loans and Title Loans
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Last updated: November 2006

Payday loans often have interest rates above 300%, so you should think twice before you sign!

Payday loans are short-term loans that range from 13 days to 120 days. Loans that are longer than 120 days are not payday loans. Payday loans have very high interest rates, averaging about 300 percent! That’s 15 times higher than the interest rates credit card companies charge.  

Payday loan companies target desperate individuals, especially the working poor and elderly on social security, people whose need for money makes it hard to say “no” to unfair loan terms.

You should avoid taking out a payday loan if possible. If you need a loan try a credit union, or see if a friend or relative can help.

How does a payday loan company make sure they get paid?

There are 3 things a payday loan company may do to make sure you repay the loan: 

  • They make you give them a post-dated check on the day the loan is signed;
  • They ask you to sign an authorization that allows the loan company to take money from your checking account; or
  • They make you sign a "wage assignment." A wage assignment allows the loan company to take 15% of your wages out of your paycheck.

Can my payday loan be extended when it becomes due?

Payday loans used to be extended when they came due. This is called a “rollover.” Now Illinois law does not allow a loan company to renew or rollover your loan. But, loan companies can make a new loan to you if the new loan will not result in you being in debt to them for more than 45 days. 

Example:  Joe Smith takes out a 13-day payday loan from Company Z. He gets a second loan from Company Z on the 13th day, and a third loan from Company Z on the 26th day. Company Z cannot give Joe a fourth loan on the 39th day because that would mean he would have a payday loan for more than 45 days. Illinois law now says that Joe would have to wait at least 7 days after he pays off the old loan before he can get another payday loan.

What is the most I can borrow?

A payday loan cannot be higher than 25% of your gross monthly income or $1000, whichever is less. So if you gross $2000 monthly, the most you could borrow from a payday lender is $500 (25% of gross monthly earnings).

What if I take out more than one payday loan?

If you have two outstanding payday loans a payday loan company cannot give you a third loan. Also, a loan company cannot knowingly accept the proceeds (money) from a second payday loan to pay off another outstanding payday loan.

Can the payday loan company charge me fees?

No fees (other than the interest) can be charged by the loan company except one charge of $25 if a check or electronic debit does not clear (bad check fee).

Can I go to jail if I don't pay the loan?

No! A loan company cannot use criminal process, or threaten to use criminal process, to collect the payday loan. So a payday lender may not file a criminal complaint for a “bad check” against a borrower to attempt to collect the payday loan.

What if I don't pay the loan on time?

All payday loans now come with a “repayment plan.” This allows you to stop the interest from building up on the debt after 35 days. If you have not paid off a payday loan after 35 days, you can ask the payday lender for a repayment plan. The repayment plan gives you 55 days to repay the loan in installments with no extra finance charges or other charges of any kind. If you and the payday lender agree, the repayment plan can be extended to 90 days.

Can I cancel a payday loan after I take it out?

Yes. You can cancel the loan - and pay no interest charges-- by paying it off in full no later than the end of the second business day after the day you signed the loan. If you already took out a payday loan, click on the link below to find out what you can do now.

What Can I Do if I Took out a Payday or Title Loan?

Do I get any special protection if I'm in the military?

Yes. A payday loan company cannot garnish your wages to collect on a loan if your are a member of the military.

Title Loans; Another Type of High Interest Loan

Another form of short-term lending is car title lending. Title loan companies target people who own their cars outright. The title loan company lends you money at huge interest rates (usually 200-300%) and gets the title to your car as "collateral." This means that if you don't pay off the loan they can take your car (repossess it) as payment.

The typical title loan has an interest rate above 200%, so you should think twice before you sign!

You should avoid taking out a title loan if possible. If you need a loan try a credit union, or see if a friend or relative can help.

What is a balloon payment?

Most title loan companies use "balloon payments." A balloon payment is a very high payment that is due on the last month of the loan. 

For example, a $3000 auto title loan would require you to pay $400 each month for 7 months. Then you would have a $3000 balloon payment in the eighth month. If you can't pay the last payment (the balloon payment) the title loan company can repossess your car and sell it.

Can I lose my car?

Yes, many title loans end up with the consumer losing their car! You should never agree to borrow money from a title lender unless you have a plan to make all the payments of the loan, including the balloon payment in the last month.

If you already took out a title loan, click on the link below to find out what you can do now.

What Can I Do if I Took out a Payday or Title Loan?

For more information, see Payday Loans and Cash Advances and Car Title Loans
 

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