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How do Pay Loan companies charge over 500 percent interest legally and why don't usury laws apply?
Wiki User
∙ 13y ago
Usury laws don't typically apply to payday lenders because the state specifically regulates payday loans. Since usury laws are at the state level, the payday lending laws override the state usury laws.
Most payday lenders charge what is known as an application or origination fee when issuing a loan and the term is clearly defined. For most states, the regulations provide for between $7 and $25 per $100 in principal (borrowed).
The average payday loan lasts for about three weeks, so we will use 21 days (of 365 actual days) as the basis for annualization.
At $7 (7% of principal), the annualized interest rate would be approximately 122% (simple interest method).
At $25 (25% of principal), the annualized interest rate would be approximately 435% (simple interest method).
So, "good" payday loan companies (read: those that are licensed) do not charge APRs of 500%.
When a person rolls over a loan, the contracts are set up so that the "extension" is actually a new loan, allowing the payday loan company to charge another application/origination fee (these are labeled renewal origination fees). In this circumstance, the annualized APRs are the same.
Wiki User
∙ 13y ago
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