TRENTON – As part of National Financial Literacy Month, Department of Banking and Insurance Commissioner Ken Kobylowski today urged New Jersey consumers to be wary of so-called payday lenders who offer short-term, small dollar loans to consumers that can end up costing far more than the original loan amount, with fees and interest rates of 500 percent or more.
“These payday lenders generally prey on low-income people, offering them loans of a few hundred dollars for one to two weeks, generally to get them through to payday,” said Commissioner Kobylowski. “The problem arises when customers can’t pay. Fees, which are a form of interest payment, increase exponentially and soon dwarf the principal, and the borrower has no hope of making the payments.”
In a typical payday lending model, customers may be told they can borrow a small amount which they are supposed to pay in full in a short period of time, generally two weeks. The promotional material for the loans does not disclose that they can effectively carry annual interest rates of 500 percent or more. Further, many lenders set up the loan in such a way that the payments are automatically withdrawn from a consumer’s checking account.
The payday lending business model is a form of consumer lending practiced almost exclusively by out-of-state or foreign entities that have not obtained the required New Jersey license and whose payment terms violate New Jersey’s civil and criminal usury rates.
In New Jersey, there are two types of usury, civil and criminal. Pursuant to New Jersey law, the civil usury rate is any interest rate greater than 6 percent for an agreement that is not in writing, and any rate greater than 16 percent where there is a written contract specifying the interest rate.
In addition to the civil usury limits, another important consideration is New Jersey’s criminal usury statute. In New Jersey, the criminal usury limitation is 50 percent for corporations and 30 percent for non-corporate borrowers.
Even though few payday lenders operate in storefronts in New Jersey, residents can be victimized by Internet-based lenders located outside of the State’s borders.
Commissioner Kobylowski urged state consumers who have encountered problems with payday lenders to contact the Department at 1-800-446-7467 or online at www.dobi.nj.gov.
“Charging grossly exorbitant interest rates to people struggling to make a living and hold onto their jobs is not only reprehensible, it is illegal and we will investigate any and all instances of this activity,” Commissioner Kobylowski.
April is National Financial Literacy Month, a national public awareness effort to help consumers establish and maintain healthy financial habits, take charge of their personal financial well-being and make smart financial decisions. For the last seven years, the Department of Banking and Insurance has conducted financial literacy programs for high school students and spoken to thousands of students in schools across the State about topics including basic personal finance, the importance of credit and how to manage credit cards. The program complements the Department’s Seniors Financial Literacy Program, which was started last year, in which the Commissioner and Department staff speak to senior citizens about such topics as life insurance, long term care, annuities, reverse mortgages and savings.