What is a “Payday Loan?”
A payday loan is a short-term, high-cost transaction where a customer borrows money for a service fee. The customer writes a personal check to the lender for the amount borrowed plus the service fee. The lender gives the customer the loaned amount and holds the customer’s check (usually until the customer’s next payday) before presenting the check to the customer’s bank for payment. You may see these advertised as a payday loan, cash advance, or check advance loan. Michigan law calls this type of loan a “deferred presentment service transaction,” because the customer’s check is held for a period of time (deferred) before it is cashed (presented for payment).
Payday Loan Disadvantages
Payday loans have high service fees and a short repayment period. For example, a customer who borrows $100 for two weeks and is charged $15 (the maximum for this loan amount), will pay a service fee equal to a triple-digit annual percentage rate (APR). The actual cost of the two-week loan is $15, which equals a 391 percent APR – and that does not include any additional fees for checking your eligibility.
Even worse, payday loans can create a trap for a cash-strapped customer who cannot repay the loan and takes out a second payday loan to pay off the first. It’s a slippery slope. When the customer cannot pay back the second payday loan, the customer takes out a third, and so on and so on. This rollover pattern racks up service fees and puts the customer in perpetual debt.
How Payday Loans Work in Michigan
The Deferred Presentment Service Transaction Act governs Michigan payday loans and limits the number of payday loans a customer ount of service fees a payday lender may charge; and a repayment date no longer than 31 days after the date of the transaction.
To process a payday loan request, the payday lender will ask for the customer’s name, address, social security number, driver’s license or other state-issued I.D., amount of the loan requested, the number on the check that will be used to cover the payday loan, and the date of the requested payday loan.
- an itemization of the fees to be paid and the equivalent annual percentage rate;
- a clear description of the process a customer may follow to file a complaint against the payday lender;
- the process and deadline to cancel the loan and get a refund of the service fee; and
- a statement that the customer should only use this service to meet a short-term cash need.
Customers are entitled to receive the loan proceeds in cash. And payday lenders must post signs informing customers: “If you request the proceeds in a check or money order, payday loans for bad credit in Avon Lake you may be charged additional check cashing or other processing fees by others for cashing the check or money order.”
A customer can have no more than two payday loans at a time; they cannot be with the same payday lender; and each loan is limited to $600, not including the fees. Payday lenders must verify a customer’s eligibility.
The State maintains an electronic database that payday lenders must check before issuing a new loan. If the customer has two outstanding payday loans, the payday lender cannot issue another one.
If the electronic database is unavailable, then a customer must sign a statement indicating that the customer does not have an outstanding payday loan with the current payday lender and that the customer does not have two outstanding payday loans with other payday lenders in the State.