Loans Payday Loans 2 — Questions and Answers
Question 1: Under the Military Lending Act (MLA), what is the maximum APR a lender can charge active-duty service members on payday loans?
- 15%
- 36% (Correct answer)
- 100%
- There is no cap
Correct answer: 36%
The Military Lending Act caps the Military Annual Percentage Rate (MAPR) at 36% for payday loans and other consumer credit products offered to active-duty service members and their dependents.
Question 2: What is a 'debt trap' in the context of payday lending?
- A legal agreement preventing the borrower from taking out additional loans
- A cycle where borrowers repeatedly roll over or reborrow payday loans, accumulating fees and unable to repay the principal (Correct answer)
- A credit scoring penalty applied after a payday loan default
- A court order to garnish wages for unpaid payday loans
Correct answer: A cycle where borrowers repeatedly roll over or reborrow payday loans, accumulating fees and unable to repay the principal
A debt trap occurs when borrowers cannot repay the original loan and continuously roll it over or take new loans to cover old ones, resulting in a spiraling cycle of fees and debt.
Question 3: What is a 'cooling-off period' in payday lending regulations?
- A grace period before interest begins accruing
- A mandatory waiting period between payday loans to prevent back-to-back borrowing (Correct answer)
- The time a lender must wait before reporting a default to credit bureaus
- A penalty-free cancellation window after signing the loan agreement
Correct answer: A mandatory waiting period between payday loans to prevent back-to-back borrowing
A cooling-off period is a state-mandated waiting time that must pass before a borrower can take out another payday loan after repaying one, intended to break the cycle of repeat borrowing.
Question 4: What happens to the borrower's bank account if a payday loan is not repaid and the lender has authorization to debit the account?
- The lender must pursue a court judgment before accessing funds
- The lender can make repeated withdrawal attempts, which may result in multiple overdraft fees (Correct answer)
- The account is automatically frozen by federal regulators
- The loan is automatically forgiven after 30 days
Correct answer: The lender can make repeated withdrawal attempts, which may result in multiple overdraft fees
If a borrower's account lacks sufficient funds, lenders may attempt multiple withdrawals in smaller amounts, triggering overdraft fees from the bank and compounding the borrower's financial burden.
Question 5: Which of the following states has been known for some of the strictest payday loan regulations, effectively limiting such loans?
- Texas
- Nevada
- New York (Correct answer)
- Missouri
Correct answer: New York
New York prohibits payday lending entirely, capping interest rates at 25% annually for civil usury, making traditional payday loan operations illegal in the state.
Question 6: What is a 'deferred presentment' transaction?
- A loan repaid through automatic payroll deduction
- A payday loan where the lender holds a post-dated check or debit authorization until the borrower's next payday (Correct answer)
- A student loan deferment until after graduation
- A home equity loan disbursed in stages
Correct answer: A payday loan where the lender holds a post-dated check or debit authorization until the borrower's next payday
Deferred presentment is the formal term for a payday loan transaction where the lender agrees to delay depositing the borrower's check or debiting their account until an agreed-upon future date.
Question 7: Which of the following is considered an alternative to payday loans for consumers needing emergency funds?
- Increasing credit card cash advances
- Payday Alternative Loans (PALs) offered by federal credit unions (Correct answer)
- Taking out a second payday loan immediately
- Applying for a jumbo mortgage
Correct answer: Payday Alternative Loans (PALs) offered by federal credit unions
Payday Alternative Loans (PALs) offered by NCUA-regulated federal credit unions provide small-dollar loans with capped fees and interest rates, offering a safer alternative to traditional payday loans.
Loans Payday Loans 2
Under the Military Lending Act (MLA), what is the maximum APR a lender can charge active-duty service members on payday loans?