Payday loan fees may not be “interest” but it still adds up to misery for borrowers

Arkansas has long had some of the strictest lending laws in the country. Twenty five years ago when interest rates on auto loans were near 20% nationally, Arkansas law required dealers to charge no more than 10% interest. People were flocking to the state from all over the country to buy cars there in order to save a fortune in interest charges. For years, Arkansas law prohibited cash advance loans, or payday loans, due to their usurious nature. But in 1999, the state passed the Check Cashers Act, which authorized the loans but maintained that the fees that accompanied them were not interest.

The 1999 law limits the interest rates on loans offered within the state to 17% per year. A typical payday loan may have interest rates that range from 300% to 1000% per year, a rate prohibited by the Arkansas Constitution. By having the law specifically state that the charges to obtain the loans were not interest, the payday loan industry was able to charge their usual fees without having to find a way to circumvent the law. Left out in the cold, however, were traditional lenders, such as banks and auto dealers, who are still limited by the 17% cap.

A judge recently ruled in a lawsuit that the Check Cashers Act is valid, and that the fees associated with payday loans are not interest. The plaintiff in the lawsuit, who represented several borrowers who had taken out payday loans, has promised to appeal to the state Supreme Court.

With a payday loan, a borrower borrows a sum of money for a short period, usually two weeks. That sum of money, which usually runs from $100-500, is accompanied by a “fee” of anywhere from $15-30 for every $100 borrowed. The borrower writes a postdated check to the lender at the time of the loan. It is assumed that the lender will cash the check on the due date. If the borrower cannot repay the loan in time, he or she can extend the loan by paying the fee again.

These fees are usually regarded by those who watch the industry as interest. After all, interest is defined by our dictionary as “a charge for a loan, usually a percentage of the amount loaned.” That certainly sounds like a description of the fee charged by these cash advance loan stores, doesn’t it?

And if the Check Cashers Act states otherwise, is interest not really interest?

Those who work in the cash advance loan industry are quite adept at finding ways to skirt state laws. If the Arkansas Supreme Court should rule that the fees are interest, and that seems likely, the lenders will simply find other ways to work around the law. Lenders in other states have done so by issuing the loans through out of state banks which are headquartered in states, like Utah, which have liberal lending rules.

The state may use whatever terms it likes. Interest or fees, it doesn’t really matter. It’s still an expensive way to borrow money.

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