At 2005 drew to a close, the business of payday loans was booming out west. Colorado lenders were seeing more customers than ever.
Perhaps as a respond to this growth in popularity, the state has passed a payday loan act, officially known as the Deferred Deposit Loan Act.
This law allows individuals to borrow up to $500 for up to 40 days by giving the cash advance lender a post-dated check. In exchange for a fee, the lender agrees not to deposit the check until the date written on it. Up until that date, the borrower can pay the amount of the check and get it back from the lender.
The fee the lender can charge for a deferred-deposit loan is 20 percent of the first $300 and 7.5 percent of any amount over that.
Therefore, if a borrower wants the maximum loan amount of $500, the lender can legally require the borrower to sign a check for up to $575. If such a payday loan is made for the maximum allowable term of 40 days, the annual percentage rate turns out to be 137 percent.
If the faxless payday loan is for 15 days, the annual percentage rate is 365 percent - somewhat higher than what your bank is likely to pay on certificates of deposit.
However, before you leap to the conclusion that these rates are overwhelming, remember that these are high-risk loans, made without collateral. Plus, the lender has costs of doing business - wages, rent, utilities, insurance, marketing, etc.
As part of the compromise that went into the Deferred Deposit Loan Act, lenders are required to use written loan agreements containing various warnings, such as: “A deferred deposit loan is not intended to meet longterm financial needs” and “Exceeding (the maximum) loan amount may create financial hardships for you and your family.”
In addition, borrowers are given a one-day right of rescission, and a written notice to that effect must be tied to an “income event” of the borrower, such as a payday (hence the commonly used name payday loan).
A deferred-deposit payday loan may be renewed only once. If the renewal occurs before the maturity date, the borrower gets a prorated rebate of the loan fee.
As the Colorado Spring Gazette outlined, there is no rebate for a prepayment not involving a renewal, however. If the lender deposits the check and it bounces, the lender can assess an additional $25 as a bad-check charge. If the lender sues to collect the payday loan, it can recover its attorneys fees, but (in a blatant attack on the income of lawyers) the fee award cannot exceed the amount of the loan.
The act requires lenders to make at least a modest effort to determine the ability of a borrower to repay a loan. In that regard, lenders must, not less than every 12 months, obtain a written loan application from the borrower and a pay stub showing that the borrower has a source of income.