Payday Loan Surety Bond
Most people are familiar with payday loans, which are small loans that are meant to cover expenses until the borrower's next paycheck arrives. Generally, the borrower goes to a payday loan broker and obtains a loan until his or her next pay period—usually within two weeks. The loan is made after the borrower provides pay stubs and bank statements to prove he or she has a steady income. For additional security the lending company usually requests that a post-dated check be left. If for some reason the borrower does not return in person to pay the loan, the lender will cash the check.
Who gets surety bonds?
Most people don't realize that the payday loan company they do business with should be both bonded and insured to guarantee they are not engaging in illegal practices. A payday loan bond is a type of surety bond designed to protect consumers from predatory practices. Surety bonds come in many forms and are generally issued by insurance and bonding companies to:
- construction companies
- contractors
- mortgage lenders
- businesses who have contact with consumers
If for some reason, the company that has the bond doesn't perform the agreed upon service or defaults on an agreement in some way, the surety bond company steps in to provide reimbursement or restitution to the consumer.
Regulations
Payday loan bonds are usually submitted with the licenses loan companies file with the state when opening their business. The bond ensures the payday loan company will adhere to all state rules and regulations concerning fair lending practices. These regulations vary widely from state to state—some may have caps on the interest rates the company can charge while some may regulate the amount of the loan and the term.
Getting the bond
Payday loan bonds can sometimes be difficult to obtain since payday loan companies often come under fire from consumer advocacy groups and legislators for their high interest rates. Some bond companies even shy away from providing these bonds due to the perceived stigma, but many other companies are happy to issue surety bonds to the many payday loan companies who do not engage in predatory lending practices.
Just as with any other financial transaction, it's crucial to shop around for payday loan bonds since rates vary widely from company to company, which sometimes depend on your credit rating. Be sure to ask the bond company how much experience they have with these types of bonds since you want someone who has experience administering them.
