Flex Loans: Fact vs. Fiction

Myth Busting:

MYTH: This is just another “payday” loan.

FACTS:

  • Unlike “payday” loans, which carry a typical APR of 400% or greater, the annual interest rate for this product will be capped at 36%, plus a daily maintenance fee as determined by the Arizona Department of Financial Institutions.
  • The lender will be mandated to put a percentage of the loan amount into an account, to be remitted to the borrower upon timely repayment of the loan.

MYTH: These types of loans are only made to the very poor and uneducated.

FACTS:

  • Individuals across every demographic and socio-economic group use short-term, small-dollar loans.
  • These loans are obtained by approximately 12 million Americans each year.
  • Typical borrowers are:
  • Working, middle-class families – the typical consumer earns $25,000-$50,000 annually.
  • Between the ages of 25-40, and many are college-educated or own a home.

MYTH: These types of loans are debt traps that only make money by keeping individuals in a cycle of debt.

FACTS:

  • Short-term, small-dollar loans are typically paid-off in 6-9 months.
  • This legislation caps loans at $2,500 or less, and requires lenders to utilize a database to ensure borrowers have not taken out additional loans in excess of the $2,500 limit.
  • Lenders are required to conduct an ability-to-pay analysis prior to each transaction, ensuring the borrower can afford the loan.
  • Loans are “closed end,” meaning the borrower cannot add to the initial loan until it has been repaid.
  • Loans must be repaid within 18 months, and there are no penalties for pre-payment.

MYTH: Customers are “tricked” into these types of loans by unscrupulous lenders.

FACTS:

  • All terms of the loan must be disclosed in accordance with the federal Truth in Lending Act.
  • This legislation goes further than state and federal regulations, requiring payment statements to disclose remaining principal balance and scheduled interest.
  • This measure provides assistance to borrowers in need by:
  • Freezing the accrual of interest charges and late fees in the event that a borrower requests assistance after falling at least three months behind on their payments.
  • Allowing the borrower to refinance the loan at a lower rate and establish a repayment plan if they complete a financial-literacy course and obtain consumer credit counseling.