Loans Payday Loans 1 — Questions and Answers
Question 1: What is the defining characteristic of a payday loan?
- It is repaid in monthly installments over several years
- It is a short-term, high-interest loan typically due on the borrower's next payday (Correct answer)
- It requires collateral such as a car or home
- It is issued only by federal credit unions
Correct answer: It is a short-term, high-interest loan typically due on the borrower's next payday
A payday loan is a short-term loan that must be repaid in a lump sum, usually within two to four weeks when the borrower receives their next paycheck.
Question 2: What is the typical Annual Percentage Rate (APR) associated with payday loans?
- 5% to 10%
- 15% to 25%
- 300% to 400% or higher (Correct answer)
- 50% to 75%
Correct answer: 300% to 400% or higher
Payday loans carry extremely high APRs, often ranging from 300% to 400% or more, because the fees charged on a short-term loan translate to very high annualized rates.
Question 3: What do most payday lenders require as a primary qualification for a payday loan?
- A credit score above 700
- Proof of income and an active checking account (Correct answer)
- Real estate as collateral
- A co-signer with good credit
Correct answer: Proof of income and an active checking account
Payday lenders typically require proof of regular income and an active checking account to deposit the loan and withdraw repayment, without needing good credit.
Question 4: What is a 'rollover' in the context of payday loans?
- Transferring the loan to another lender at a lower rate
- Extending the loan term by paying an additional fee instead of repaying the full balance (Correct answer)
- Consolidating multiple payday loans into one payment
- Automatically deducting the loan from the borrower's paycheck
Correct answer: Extending the loan term by paying an additional fee instead of repaying the full balance
A rollover occurs when a borrower cannot repay the loan on the due date and pays a fee to extend the loan, which dramatically increases the total cost of borrowing.
Question 5: Which federal law requires payday lenders to disclose the APR and total finance charges to borrowers?
- The Fair Credit Reporting Act (FCRA)
- The Truth in Lending Act (TILA) (Correct answer)
- The Equal Credit Opportunity Act (ECOA)
- The Fair Debt Collection Practices Act (FDCPA)
Correct answer: The Truth in Lending Act (TILA)
The Truth in Lending Act (TILA) mandates that lenders disclose the APR and all finance charges before the borrower agrees to the loan, enabling comparison shopping.
Question 6: What is the typical loan amount range for a payday loan in the United States?
- $5,000 to $25,000
- $1,000 to $5,000
- $100 to $1,000 (Correct answer)
- $25,000 to $50,000
Correct answer: $100 to $1,000
Payday loans are small-dollar loans, typically ranging from $100 to $1,000, intended to cover short-term cash needs until the borrower's next payday.
Question 7: Which federal agency has primary supervisory and regulatory authority over payday lenders?
- The Federal Reserve Board
- The Office of the Comptroller of the Currency (OCC)
- The Consumer Financial Protection Bureau (CFPB) (Correct answer)
- The Federal Deposit Insurance Corporation (FDIC)
Correct answer: The Consumer Financial Protection Bureau (CFPB)
The Consumer Financial Protection Bureau (CFPB) has broad authority to supervise and regulate payday lenders and has issued rules to protect consumers from harmful payday lending practices.
Loans Payday Loans 1
What is the defining characteristic of a payday loan?