A cash advance loan is a small, short-term, high-interest loan that is offered in anticipation of the receipt of a future lump sum of cash or payment. Although a cash advance may be made in anticipation of future legal winnings, pensions, inheritances, insurance awards, alimony or real estate proceeds, the most common cash advance loans are Payday Loans and Tax Refund Anticipation Loans.
What are payday loans?
A payday loan is a relatively small, high-cost loan, typically due in two weeks and made with a borrower’s post-dated check or access to the borrower’s bank account as collateral.
Payday lending in New York is illegal
It is a violation of New York State law to make payday loans in-person, by telephone, or over the Internet. It is also illegal for a debt collector to collect, or attempt to collect, on a payday loan in New York State.
- Payday loans are designed to trap borrowers in debt. Due to the short term, most borrowers cannot afford to repay both the loan and pay their other important expenses.
- If the loan cannot be paid back in full at the end of the term, it must be renewed, extended, or another loan taken out to cover the first loan. Fees are charged for each transaction.
- The annual percentage rates on payday loans are extremely high, typically around 400% or higher.
- Lenders ask that borrowers agree to pre-authorized electronic withdrawals from a bank account, then make withdrawals that do not cover the full payment or that cover interest while leaving principal untouched.
- If the lender deposits a repayment check and there are insufficient funds in the borrower’s account, the borrower is hit with even more fees for insufficient funds.
Steer clear of payday loans
If you are struggling to pay your bill:
- Ask your creditors for more time. Find out what they charge for late payments, finance charges or interest rates since it may be lower than what you might end up paying for a payday loan.
- Work with a community development credit union or a non-profit financial cooperative, which may provide affordable small-dollar loans to eligible members.
- Ask for a salary advance from your employer, or borrow from family or friends.
- Consult social service agencies, they may have programs to help with food, housing, and home heating costs.
To File a Complaint
- Notify the Department of Financial Services at (800) 342-3736 if you believe payday loans are being made in New York or to New York residents, or if a debt collector is seeking to collect on a payday loan in New York.
- File a complaint with the Consumer Financial Protection Bureau or by calling (855) 411-2372.
- File a complaint with the Federal Trade Commission or call them toll-free at 877-FTC-HELP (877-382-4357).
Tax Refund Anticipation Loan
Some tax return preparers offer what they may call ‘instant’, ‘express’ or ‘fast money’ refunds. These refunds are loans borrowed against the amount of your anticipated refund. These loans often include extremely high interest rates and high fees. They must be repaid even if you don’t get your refund, or it is smaller than anticipated. To avoid the temptation of getting a Refund Anticipation Loan:
- File your tax return electronically and have your refund deposited directly into your bank account. This will speed up your refund. Some refunds will be deposited in as few as 10 days.
- If you don’t have a bank account, open one.
- Go to a Volunteer Income Tax Assistance (VITA) site at your local library or community center. The IRS Volunteer Income Tax Assistance (VITA) and the Tax Counseling for the Elderly (TCE) programs offer free tax help for taxpayers who qualify.
- AARP Tax-Aide helps people of low-to-middle income, with special attention to people who are 60 and older, with taxes and refunds. To locate the nearest AARP Tax-Aide site, call 1-888-227-7669.
Types of loan scams
Advance Fee Loan Scam
These scams involve a company claiming that they can guarantee you a loan if you pay them a processing fee, an application fee or pay for ‘insurance’ on the loan in advance. The company will advertise on the Internet, in the classified section of a newspaper or magazine, or in a locally posted flyer. They will sometimes use a legitimate company’s name or use a variant of a trusted name. They will sometimes ask you to call them at a "900" number, which will result in charges to your phone bill. They will usually ask to be paid via overnight or courier service or by wire, so that they can’t be traced. To avoid being taken in by this scam, you should be aware that:
- It is against the law for anyone to ask you to pay in advance to receive a loan or credit card.
- A legitimate lender will never guarantee you a loan or a credit card before you apply, especially if you have bad credit, no credit, or a bankruptcy petition on your credit report.
- These scams should not be confused with:
- pre-qualified offers, which mean you are selected to apply and must go through the normal application process.
- pre-approved offers, which require only verbal or written acceptance.
- Don’t ever give out personal information or agree to a loan over the phone or via the Internet.
Government Grant and Loan Scam
This scam, like the advance fee loan scam, uses the Internet, phone, and newspaper to advertise. A company claims that they can guarantee a grant or loan from the government in exchange for a fee. Victims are instructed to send money to pay for ‘insurance’ on the promised grant or loan. They will usually ask that the money be sent via overnight or courier services or by wire, so that they don’t leave any trace of their identity or location. They then provide the victim with information that is available in any library or can be ordered directly from the government.
The information in this article was obtained from various sources not associated with Adirondack Bank. While we believe it to be reliable and accurate, we do not warrant the accuracy or reliability of the information. Adirondack Bank is not responsible for, and does not endorse or approve, either implicitly or explicitly, the information provided or the content of any third-party sites that might be hyperlinked from this page. The information is not intended to replace manuals, instructions or information provided by a manufacturer or the advice of a qualified professional, or to affect coverage under any applicable insurance policy. These suggestions are not a complete list of every loss control measure. Adirondack Bank makes no guarantees of results from use of this information.
Article written by the New York State Department of Financial Services