An expensive line of credit is not much different than a quick cash loan

The cash advance loan business is one that has come under increasing fire from legislatures and advocacy groups, as more and more people are concerned about impoverished people borrowing money at rates that can exceed 400% per year. It’s great for the lenders, but bad for the consumers, who often struggle to repay debts that end up growing over time. A small $200 loan can easily grow into a $1000 one if the cash-strapped borrower continues to renew the loan if they are unable to repay it. This is often the case, as many borrowers earn little more than the minimum wage.

In some states, such as Arkansas, North Carolina and Pennsylvania, legislatures have decided that they have had enough, and they have asked these high-interest lenders to stop offering their loans within their states. In the case of Pennsylvania, industry giant Advance America has stopped offering payday loans but has responded by offering a new product - the “Choice” line of credit.

With a traditional quick cash loan, a lender issues an amount between $200-500 and the borrower writes a check for that amount, plus a fee that can range from $15-35 per $100 borrowed. In two weeks’ time, that loan is expected to be repaid and the lender will cash the check. If the borrower wishes, they may renew the deal for another two weeks by paying the fees a second time. Viewed as interest, these fees can approach or exceed 400% per year. 

With the new product, the “Choice” line of credit, things work differently. The borrower is given a line of credit that will allow them to borrow up to $500 per month. The interest rate is about 6% and the borrower must repay at least $20 of the balance at the end of the month. In addition to this, the borrower must pay a $150 “participation fee” each month to continue using the line of credit. While not a loan per se, this line of credit system has aroused the ire of Pennsylvania officials, who see this as a deliberate attempt to circumvent the state’s 27% cap on annual interest rates.

At the moment, the product remains available, but the state is looking into it in order to see if it is actually legal. In the meantime, consumers seem eager to line up to apply for the line of credit, as it seems for many people to offer opportunities that are not available from traditional lenders.

Creating a new lending product is an unusual way to circumvent state usury laws. Most of the time, lenders take advantage of Federal banking rules by simply electing to use banks from another state. You may walk into a cash advance store in state A, but the loan you are granted may technically come from a bank in state B. If state B has more lenient interest rates than state A, you will be charged the rates permitted by the laws of state B.

Lenders can call their products whatever they like, but 400% interest rates are still higher than anyone ought to have to pay.

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