By Margaret Mitschke*
Most students, at one time or another in their life, have to face the topic of loans. Whether it be for a car payment, a student loan, a payday loan, a mortgage, or any other type of loan, many of them have the same characteristics. However, if a student does not fully understand the legal and financial terms of their loan, they can end up with an out of control debt. Here are a few tips to keep in mind when it comes to taking out a loan.
Texas Usury Laws
Usury laws set the maximum interest rate an entity can charge for certain types of loans. The Attorney General of Texas explains that there are two main types of loans: commercial and consumer. Commercial loans are taken out primarily for business operations, investments, or agriculture. These loans can have an interest rate of up to 18 percent, and loans that are over $250,000 can have a maximum 28 percent interest.
Consumer loans are loans taken for personal, family, or household use. The maximum rates on these types of loans vary greatly depending on the type of loan and how much money is borrowed. The ceilings for these rates are created by the Office of Consumer Credit Commissioner, and include weekly, standard annual, monthly, credit card, lender, and several other interest rates. The weekly and monthly rate ceilings on most loans is 18 percent. However, it is not as easy as this to estimate what the maximum interest rate will be because different loans are regulated by different laws. For example, according to the Attorney General of Texas, the law that governs financing of motor vehicle sales sets the maximum effective annual interest rate at 27 percent, while pawn shop loans have a maximum of 240 percent.
Payday loans are defined by the Consumer Financial Protection Bureau as a short-term loan, generally for $500 or less, that is typically due on your next payday. These types of loans are different from other loans in that lenders often use a “finance charge” rather than an interest rate. This finance charge can range from $10 to $30 for every $100 borrowed for the loan. If this were translated to an annual percentage rate, $15 per $100 borrowed would be the same as 400 percent. Also, to receive a payday loan, you often must give the lender access to your checking account, or write a check for the full amount you will owe on your next payday in advance.
There are several key things to look for when applying or signing up for a loan of any kind.
- Paying a fee before receiving the loan funds. It is illegal for the lender to charge you a fee in advanced before you receive the money from the loan;
- Be careful of lenders advertising low interest rates and guaranteed approval despite having a poor credit history, score, or history of bankruptcy;
- Be careful when agreeing to co-sign a loan. Since you are then agreeing to pay if the borrower does not pay, you can be held liable for all of the remaining debt; and
- Always be sure to check the terms of the contract you are signing when it comes to loans, especially short term loans. The contract will determine how often interest is compounded, what day of the month you pay, if you can make extra or early payments, and other important information.
When it comes to loans, the conditions and contracts can be overwhelming. If you wish to review your potential loan contract, you can set up an appointment to speak with your full time on campus attorney. Please feel free to contact us and make an appointment at (936) 294-1717, or go online at http://www.shsu.edu/legalservice to schedule a free consultation with our attorney. Also, consider speaking with the Student Money Management Center to help you prepare before applying for a loan or helping once you have made the loan.