Personal and Payday Loans: Unsecured Credit at a Higher Cost

Personal and Payday Loans: Unsecured Credit at a Higher Cost

Plus: Avoiding Loan Scams!

Personal Loans
As a loan that can be used for almost any reason (to consolidate debts, finance a wedding, fund a special vacation, complete home improvements, or cover a variety of other expenses), personal loans can seem almost too good to be true. However, personal installment loans can carry certain pros and cons which a borrower must consider before signing on the “dotted line.”
In contrast to a secured loan which requires some form of security such as a house or car, in an unsecured transaction, credit is extended solely on the borrower's promise to repay the debt (collateral is not required). Unsecured personal loans prove the most risky for lenders since the borrower does not offer any of his or her personal property as collateral that the lender can repossess if the consumer defaults. Since the lender undertakes greater risk, borrowers face higher APRs.

Payday Loans

Payday loans, also known as paycheck advance loans, can be a short-term option to consumers who have bad credit and cannot obtain a traditional bank loan, credit card, or other borrowing alternative, and who urgently need cash to cover expenses prior to a payday. Since payday loans often do not involve a credit check, they can be speedily approved, often within a few hours. However, while payday loans may seem like a simple and quick means to obtain much-needed fast cash, they are not quick fixes for larger financial problems. Since borrowers oftentimes need only a checking account and verification of employment to qualify for payday loans, lenders routinely do not base their loan decisions on the ability of borrowers to repay. Thus, payday loans could pose a sort of “financial quicksand” as many financially challenged borrowers may need a month or more (rather than just a few weeks) to pay off these expensive, short-term debts. 
Under the state and federal Truth in Lending laws, designed to protect consumers and promote the informed use of consumer credit, lenders must provide a clear disclosure of the key terms and costs of the payday lending arrangement. Thus, when considering a payday loan, the borrower is entitled to receive in writing both the finance charge and the annual percentage rate (APR).



Maine Law and Payday Loans: 9-A M.R.S.A §2-201 (6)(c)

Under Maine law, payday lenders may charge no more than $25.00 when the amount financed is $250.00 or more. Although $25 may seem like a small fee, it equates to a substantial APR if calculated for a one or two-week loan. Think about it:  If you renew a two-week loan of $250 every other week for a year, you will be paying $650 in interest for your $250 loan! Most Internet (unlicensed) payday lenders charge even greater fees, and are already be violating the law if they make loans to Maine residents without first obtaining a Supervised Lender license!

Advance Fee Loan Scams – A Warning!

The Bureau advises consumers to avoid falling prey to so-called advance fee loan scams. An advertisement (TV, newspaper/print, radio, Internet) or telemarketing solicitation will offer to loan/grant a consumer “thousands of dollars” at a low APR in exchange for a one-time payment ($100 - $1,000 or more) to handle “administrative” or “insurance” costs. The victims wire funds, oftentimes to Canada, in anticipation of the loan/grant proceeds, which are promised in “a week or two.” Bottom line, the funds never arrive.  Never give out personal information to an unknown solicitor!

WARNING! Internet/Unlicensed Payday Lenders

The Bureau of Consumer Credit Protection has received numerous complaints from Maine consumers who have entered into payday loan agreements with unlicensed payday lenders located outside of Maine, and sometimes even from foreign countries!
These lenders obtain checking account information so that they can make a deposit into the consumer’s account, but also so that they can debit/withdraw money back out of the account to pay the loan’s fees, principal and high interest charges.
Most of these companies choose to illegally ignore Maine licensing laws, and likely do not have a local brick-and-mortar office location. Because they feel that they can’t be effectively regulated by states outside of their home location, many of these lenders engage in predatory tactics such as charging hundreds of dollars in fees for a relatively small payday loan. The APRs for these unlicensed companies’ loans can be astronomical.
One southern Maine consumer complained about a Nevada-based Internet payday lender that debited his bank account $90.00/week for fourteen weeks ($1,260) for a $300 loan – incredible!
- Use Extreme Caution When Providing Private Personal Information to Internet Lenders! To see if a lender is licensed, call the Bureau of Consumer Credit Protection Monday through Friday between 8 a.m. and 5 p.m., or check our website at www.Credit.Maine.gov, and click on “rosters” for Supervised Lenders.  Our agency strongly recommends only dealing with payday lenders licensed by our agency!

Yet Another Scam!

Many Mainers (including those offering to sell items on the Internet) report that they have received a realistic-looking check in the mail, together with a request to deposit the check in their bank account and mail or wire a portion of the check back to sender. The problem is, the bank check is a fake, and the consumer has been hoodwinked into sending “real” money back.