Why A Payday Advance Is Not Predatory Lending

The term “predatory lending” has received a lot of attention recently, but often its definition is unclear and the distinction between predatory lending and subprime lending can be inaccurately synonymous.

In general, predatory lending is defined as a harmful form of subprime lending in which consumers are pressured to take loans they don’t need, putting valuable assets at risk. Federal Reserve Governor Edward Gramlich said in an address to the Texas Association of Bank Counsel in South Padre Island, Texas, October 9, 2003 that predatory lending typically involves at least one, and perhaps all three, of the elements listed below. Not one of these elements applies to payday advance and here’s why.

Three Elements of Predatory Lending, according to Federal Reserve Governor Gramlich

Why Payday Advance is NOT Predatory Lending

Making unaffordable loans based on the assets of the borrower rather than on the borrower’s ability to repay an obligation.

Payday advance is a small denomination, un-collateralized, unsecured short-term financial transaction based on the borrower’s steady income.


Inducing a borrower to refinance a loan repeatedly in order to charge high points and fees each time the loan is refinanced (“loan flipping”).

Most state laws prohibit the extension of a payday advance by paying an additional fee (rollover). CFSA members do not encourage rollovers and, in states where rollovers are permitted, limit them to 4 or the state limit, whichever is less.

Engaging in fraud or deception to conceal the true nature of the loan obligation from an unsuspecting or unsophisticated borrower.

The cost of a payday advance is fully disclosed to customers on signage and in disclosure agreements. It is a one-time, flat fee and there are no hidden charges, balloon payments or accruing interest. CFSA members also provide an educational brochure emphasizing responsible use of the product and offer a free right of rescission should the customer change his mind.

Payday advances are small, short-term cash advances with simple terms and fees. Thirty-seven states and the District of Columbia have laws and/or regulations governing this product. The industry is dedicated to working with interested parties to ensure that consumers use the service appropriately. CFSA members believe that payday lending should be conducted in a safe and responsible manner and with appropriate disclosures and strong consumer protections. CFSA’s Best Practices, which apply to all CFSA members, are intended to ensure such conduct.

Connecting With Our Communities

Managing household finances can be a daunting task. However, by using solid budgeting and savings techniques, you can accomplish major financial goals. In the Customer Resource Center, CFSA offers a variety of payday advance resources that support and encourage responsible lending practices, and highlight the vital role of our members’ stores in neighborhoods near you.

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Here you will find an aggregate of industry research, comprehensive data, and benchmarking tools from the short-term lending industry. They cover all payday advance business areas – consumer demographics, media hits, the latest policy initiatives, among others. Click here to access to the partner's resource library.

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For Our Policymakers

CFSA works at the federal, state, and local levels educate legislators and regulators about the role of payday advances in the broader financial services arena. This section provides resources for policymakers who believe in access to credit, want to preserve financial options and ensure balanced, substantive consumer protections. Click here to enter the Policymaker Resource Library.