How Payday Lending Laws Work in Texas
Texas payday lending laws are unique and do allow for payday lending. Costs and fees for payday lending vary by lender, by whether a Credit Access Business is involved in the transaction, and by whether local city ordinances apply to the loan.
This guide breaks down the primary Texas payday lending rules and regulations. It further provides information on Credit Access Businesses, city regulations, and considerations before obtaining a short term loan.
The Basics of Texas Payday Lending Laws
Most Texas payday loans are made via Credit Access Businesses, or CAB for short. CABs assist in arranging a loan from a third party lender and may charge a fee for the service. As a borrower, this may mean that to fully understand the cost of a loan, both the lender’s charge and the CAB’s fee must be reviewed.
The Texas Office of Consumer Credit Commissioner (OCCC) oversees Credit Access Businesses. The OCCC also provides licensing information and consumer resources related to payday and auto title lending in Texas.
Why Texas Payday Loan Costs Can Be High
Texas does not have a uniform cap on payday lending rates like many other states. This is the primary reason that the costs for payday loans in Texas may be much higher than those of other lending options.
Upon receiving a loan offer, borrowers should first assess the annual percentage rate, finance charge, CAB fee, repayment due date, renewal terms, and total repayment amount before agreeing to the offer. For a short term loan, the annual percentage rate (APR) may appear very high because the cost is expressed as an annual figure, even though the loan term is significantly shorter.
Should the loan be renewed, refinanced, subject to late payments, or placed in collections, the total cost of the loan will also change. Before accepting a loan, the borrower should make sure the payment fits their budget and does not make it harder to cover rent, food, utilities, transportation or other basic needs.
How Credit Access Businesses Fit Into Texas Law
Credit Access Business and lenders are not the same. While one may provide the service of accessing the loan, the other is the lending institution that provides the credit. The CAB will collect a fee for the service they provide.
This is also a reason why borrowers are encouraged to read the complete contract. This contract includes the loan amount, the interest charged by the lending institution, the fee charged by the CAB, the total cost of the loan, and the due date and repayment schedule.
Local Payday Lending Rules in Texas Cities
Local amendments to Texas payday lending practices add provisions for both payday and auto title lending in various Texas cities. These amendments limit refinancings, renewals, loan sizes, and payment structures. As an example, most city laws state that a payday loan should not exceed 20% of a borrower’s gross monthly income. These laws also state what the limits are on loan repayment and renewal.
City laws aren’t uniform in Texas. Borrowers need to consider the laws in the city they are borrowing from before agreeing to a loan.
Can a Texas Payday Loan Affect Credit?
Taking out a payday loan may or may not affect a borrower’s credit. There are payday lenders that do not report to credit bureaus that a borrower’s loan has been paid. However, unpaid loans pose a risk to a borrower’s credit if the loan is sent to a collection agency.
Potential borrowers should inquire whether payment activity will be reported before agreeing to a loan. Timely payment of the loan may help avoid collection activity and late penalties, but it does not guarantee that the borrower will see an increase in credit score.
What Borrowers Should Review Before Accepting a Loan
Before agreeing to a payday loan in Texas, potential borrowers should review all the loan repayment terms, especially the total costs to the borrower. Repayment terms include the loan amount, the Annual Percentage Rate (APR), the finance charge, the CAB fee, the payment date, renewal terms, late penalties, and the total repayment amount.
All these terms should also be compared to alternative loan plans. These may include payment plans from service providers, assistance from local nonprofits, and a small personal or installment loan. The ideal loan is the one that the borrower can afford and that has the most transparent terms.
Conclusion
State regulations, the CAB model, lender provided terms, and local city ordinances govern the payday lending law in Texas. Because costs can vary, borrowers should pay close attention to the agreement and consider the total repayment amount in contrast to the loan amount.
A short term loan should be used with care. Understanding the rules before accepting an offer can help borrowers make a more informed decision.