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resents an increase from as recently as 2005, when the typical payday loan amount was in the range of $250–$300. 27 The maximum loan amount permitted depends on state law. Some states have a tiered pricing system and, for ease of calculation, the original Scorecard chose an amount ($250) that would not trigger more than one tier. (For the sake of consistency be- tween the original and updated Scorecards, this amount has been retained.) For example, Colo- rado permits a fee of 20% on the rst $300 and then 7.5% on the balance.

The statutory backup to the Scorecard also tracks whether states permit a lender to hold a consumer’s check or obtain authorization to debit the borrower’s bank account. The prac- tices of check holding and electronic debiting give the lender access to the consumer’s bank account with no further action by the con- sumer after the loan is made. Internet lenders rely heavily on the ability to debit electroni- cally the consumer’s bank account; they also may include ne print in their loan contracts to permit them to create and submit for pay- ment an unsigned check using the borrower’s account information to collect funds from the borrower’s bank account even if the borrower revokes debit authorization.

2. One-month, $300 auto-title loan

To obtain an auto-title loan, a borrower signs over the title to a paid-for car and, in some states, provides the lender with a spare set of keys. The loan is usually due within a month in one balloon payment. If the borrower fails to repay the loan, the lender can take and sell

27 Mark Flannery & Katherine Samolyk, Payday Lend- ing: Do the Costs Justify the Price? 1 (FDIC Center for Financial Research Working Paper June 2005), avail- able at http://www.fdic.gov/bank/analytical/cfr/ 2005/wp2005/cfrwp_2005-09_annery_samolyk.pdf.

6 5 Updated Small Dollar Loan Products

the car. In some states, title lenders are allowed to keep the surplus from the sale of the car, allowing title lenders to reap a windfall from the borrower’s default. The lenders typically perform no assessment of ability to repay.

Typically, a car title loan is due in one month and has a principal amount of approximately $300. The Scorecard based its APR calculations on a $300 loan. Auto-title lenders typically do not make large loans; loan size is dependent on the value of the car and they lend no more than 30% to 50% of value to ensure negligible losses if the car is taken by the lender and sold in the event of default. In some states, such as South Carolina28 and California,29 lenders make larger loans secured by car titles to avoid limits on interest and fees for small loans.

3. Six-month, $500 unsecured installment loan

Short-term installment loans are offered by dif- ferent types of lenders, but are most commonly made by nance companies. These lenders nor- mally assess the ability of the borrower to repay the loan. Repayment is usually made in install- ments of equal amounts which cover both principal and interest. Interest rates and APRs can be lower for consumers with better credit records or scores. If the borrower defaults, the lender can obtain a court judgment for repay- ment of the loan. The Scorecard uses a loan slightly larger than either a payday or an auto title loan to compare the cost of an installment, as opposed to a single-payment, loan.

28 Title loans over $600 are not subject to any interest rate cap. S.C. Code Ann. § 37-3-201. However, even a $300 title loan has a 117% APR.

29 Title lenders in California do not offer a $300 prod- uct, but they will make loans of $2500 and above be- cause they can do so with no rate cap. Cal. Fin. Code § 22303 (West).

NATIONAL CONSUMER LAW CENTER

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