Chalk One Up For Consumers!

Chalk one up for consumers! The California Supreme Court unanimously held that interest rates may render a consumer loan unconscionable even in the absence of a statutory interest rate cap. The ruling has also been covered in the LA Times and the American Banker.  This allows courts to take into account the facts and equities of each case, and not simply rely on a statutory rate.  The Court and the Amicus Brief filed by the consumer advocacy organizations cited Embracing Unconscionability’s Safety Net Function, 58 ALA. L. REV. 73-117 ( in understanding the contract doctrine of unconsionability’s historical roots in courts of equity.

More Evidence That Americans Want Payday Loans Regulated, and In Certain Ways

Payday loans are short-term loans that generally must be paid on the borrower’s next payday–typically, two weeks. These loans carry a fee of around $15 for every $100, payable at the end of those two weeks. But most borrowers are unable to pay within two weeks. Instead, they roll the loans over, sometimes multiple times, making these “small dollar loans” much more expensive, and APR a better gauge of actual borrowing cost. According to the Consumer Financial Protection Bureau (CFPB), the typical two-week payday loan carries an APR of 400%. In response to the inability of borrowers to pay such high interest rates, some states have regulated these types of law, and the CFPB has proposed rules to regulate payday and auto title loans. For instance, New Mexico’s governor recently signed a bill that outlaws small dollar loans with terms less than 120 days and caps interest rates on small dollar loans at 175%.

In light of the national attention that payday loans continue to receive, what does the American public think about them and various proposed reforms? Last week, Pew Charitable Trusts released the results of its recent survey of 1,205 American adults that aimed to assess public sentiment about proposed reforms. Highlights of the study include three key findings.

First, 70% of respondents indicated that they think payday loans should be more regulated. Second, in determining whether a loan is effective, respondents focused on the pricing of the loan, rather than the process by which the loan was issued–that is, interest and fees versus whether the borrower’s credit report is pulled. Finally, third, 70% of respondents wanted to see banks offer small dollar loans to people with poor credit, so much so that 70% of respondents indicated they would view banks more favorably if they offered small dollar, lower-cost loans. And lower-cost does not mean loan. Lower-cost includes a $400 loan, due in three months, for a $60 fee.

This finding comports with respondents answer to another question about banks offering an alternative to payday loans. 75% of respondents indicated that it would be a “good thing” if banks offered small dollar loans with APRs higher than credit cards, but lower than current payday loans. Overall, this new survey’s findings should be kept in mind as states and the CFPB continue shaping payday loan regulations.

A Basic Guide to Understanding Missouri Payday Loans for the Missouri Consumer

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 daysafter 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.

Payday Loan Alternatives and Resources

  • —Borrow from a credit union or other small loan lender. Be sure you understand all the fees and terms before you sign.
  • Put off the expense until you have the money. For example, if you need money to repair your car, find other transportation until you have the funds to fix the car.
  • —Request overtime or secure a part-time job to cover the unexpected expense.
  • Contact your creditor and ask for more time to pay or a repayment plan.
  • —Use your credit card or obtain one if you do not currently have one. Even if you have to get a cash advance, it will be much less expensive than a payday loan.

If none of those options are available, a payday loan may be appropriate.  Prior to seeking a payday loan, you should always educate yourself regarding what it means to have a payday loan and what your obligations will be.  The resources below are a great starting point.


  • Consumer Federation of America – Payday Loans
  • Consumer Financial Protection Bureau
    • Government agency that provides information and complaint service for consumers
  • National Consumer Law Center

Potential Cost of a Payday Loan in Colorado

Payday loans can be difficult to understand, and the costs associated with them can be incredibly burdensome.  Prior to obtaining a payday loan, you should try to understand as much as possible about what you are actually going to be on the hook for.  Here is an example of what potential costs could look like in Colorado:

There are three allowable costs in Colorado
• Finance Charges
• Interest Charges
• Maintenance Charges

Using the maximum loan amount of $500 and the minimum term of 6 months, potential costs could look like this:

1. Finance Charges can equal up to 20% of the first $300 and an additional 7.5% of the remaining $200. These are automatically earned on the date of the transaction.
 $300 x 20% = $60
 $200 x 7.5% = $15
This gives us $75 in finance charges

2. Interest Charges may also be charged at 45% per year for each loan; the charge is only applicable to the amount borrowed, and not any additional fees.
 $500 x 45% = $225
 $225 / 2 = $112.50 [if compounded annually]
This gives us $112.50 in interest charges.

3. Maintenance Charges of $7.50 per $100 borrowed is also allowed and only charged after the first month.
 $7.50 x 5 = $37.50
 There is a limit of $30/month
 $30 x 5 = $150
 These charges do not start until the second month
This gives us $150 in maintenance charges

The maximum cost allowable under Colorado law breaks down as follows:
 $75 – Initial finance charges
 $112.50 – Interest charges
 $150 – Maintenance charges

This gives a total cost of $337.50 for borrowing $500 for six months!!
This amounts to roughly 630%!!

This means that in order to borrow $500, you will ultimately need to pay back $837.50.  This is exactly why it is so important to know what you are on the hook for.  The high cost can drive you into a cycle of needing a payday loan in order to pay off your previous payday loan.

Payday Lending FAQ

What is a payday loan?

  • Short-term loan designed to meet immediate needs
  • Generally three features
    • Small amounts
    • —Typically due your next payday
    • You must give lenders access to your checking account or write a check for the full balance in advance that the lender can deposit when the loan comes due.

How much does a payday loan cost?

  • —A typical two-week payday loan with a $15 per $100 fee equates to an annual percentage rate (APR) of almost 400%.
  • See my previous blog post for an example based upon Colorado law.

Are payday loans more expensive than credit cards?

  • Yes, typical credit card APRs are between 12% – 30%.  Furthermore, credit cards can be paid back over the course of time whereas payday loans are typically due all at once.

What does it mean to roll over or renew a payday loan?

  • Usually this means that you pay a fee to delay payback of the loan.  This is in addition to the original loan fees.  Sometimes these renewals will place the original fees into the principal of the new loan.  This allows fees to be charged on the new, higher loan amount.  Many states limit or ban roll overs.  You can find more information on each states roll over policy in the resources listed below.

Do online payday lenders need to follow state regulations?

  • Yes, online payday lenders must follow the regulations of the state of residence of the borrower.

Are there special regulations for Military borrowers?

Do I need to get a credit check for a payday loan?

  • No, payday lenders typically do not check the three major credit bureaus to make their determination.  Some lenders use alternative credit reporting services to determine creditworthiness.

What are some alternative solutions to payday loans?

  • —Borrow from a credit union or other small loan lender. Be sure you understand all the fees and terms before you sign.
  • Put off the expense until you have the money. For example, if you need money to repair your car, find other transportation until you have the funds to fix the car.
  • —Request overtime or secure a part-time job to cover the unexpected expense.
  • Contact your creditor and ask for more time to pay or a repayment plan.
  • —Use your credit card or obtain one if you do not currently have one. Even if you have to get a cash advance, it will be much less expensive than a payday loan.

Where can I get more information?

  • —Consumer Federation of America – Payday Loans—Great resources on state specific regulations— 
  • —Consumer Financial Protection Bureau—Government agency that provides information and complaint service for consumers— 
  • —National Consumer Law Center—Nonprofit agency focusing on consumer rights issues—