Americash Loans, a payday lender, is facing a potential class action over its lending practices. Kevin Johnson, of Chicago, ILL, filed the suit this month, alleging that the lender evades the payday lending legal definitions.
At the heart of this issue are the terms of the loan. In 2008, Mr. Johnson borrowed $700 as a short-term payday loan from Americash. Under the terms of the agreement, Mr. Johnson was required to pay back the loan in 24 semi-monthly installments of $105.30 for one year. This adds to $2,611 dollars, which is an annual interest rate of 365 percent.
Mr. Johnson made steady payments for 6 months, after which time he was unable to continue the payments, so Americash provided him with a second loan in February of 2009, for $400, with terms similar to those of the first loan. If Mr. Johnson pays both loans, in full and on time, he will end up paying nearly $3,500 to Americash as repayment of an initial $700 loan.
While Illinois has payday lending regulations in place, presumably to prevent these types of practices, Americash stretched the terms of Mr. Johnson's loan one day beyond the 120-day limit by which the state defines a "payday loan," instead distributing the funds as a consumer installment loan, which remain virtually unregulated.
The lawsuit contends that Americash violated the state's Consumer Fraud and Deceptive Practices Act, which prohibits the use of business practices that "violate the public policy of Illinois, or are unconscionable or unfair or inflict substantial injury upon a consumer." And, the complaint alleges that the contract Johnson signed contained an 'arbitration clause' in print so fine it was nearly impossible to read, stating that he would be responsible for any legal fees incurred if his loans had to be settled through arbitration. Americash reportedly knew that Johnson could not afford these expenses.
If the lawsuit succeeds, Johnson and other customers of Americash involved in the class action who paid more than 5 percent interest on their loans will be reimbursed.