Tribal payday loans: how they work and why installments replaced them

A payday loan is due in one lump sum on your next payday. Most tribal lenders now sell installment loans instead, but the payday structure still shows up in marketing and in some lenders' products. Here is how it works, what it costs, and what to do instead.

How a payday loan works

You borrow a small amount, usually $100 to $1,000, and agree to repay it plus a fee in a single payment on your next pay date, typically two to four weeks later. Repayment is pulled from your checking account automatically. If you cannot repay the full amount, many payday lenders let you pay only the fee and "roll over" the loan for another pay period. The fee does not reduce what you owe.

Why rollovers are the real cost

A typical fee of $15 per $100 borrowed for two weeks works out to about 391% APR. That is expensive but survivable for one cycle. The problem is repetition. Borrow $500 at $75 per two weeks, roll it over five times, and you have paid $450 in fees across six pay periods and still owe the full $500. The Consumer Financial Protection Bureau has found that most payday loan volume comes from borrowers caught in long sequences of renewals.

Why most tribal lenders moved to installment loans

Installment loans are repaid in a series of scheduled payments, and each payment reduces the principal. The balance reaches zero on a known date. That removes the rollover trap, and it lets lenders offer larger amounts. Nearly every lender in our comparison sells installment loans or a line of credit rather than single-payment loans.

Installments are not automatically cheaper. A long term at a high APR can cost more in total than a short payday loan. At 400% APR, $500 over 6 months comes to about $203 a month and $717 in total interest ($1,217 repaid in all).

How state payday rules compare

State-licensed payday lenders must follow state limits. For example:

• Florida caps single-payment loans at $500 with fees of 10% plus a $5 verification fee, bans rollovers, and allows one outstanding loan at a time. See tribal loans in Florida.
• California caps payday checks at $300 with a fee of no more than 15%. See tribal loans in California.
• Missouri allows up to six renewals, each reducing principal by at least 5%, with total fees capped at 75% of the loan. See tribal loans in Missouri.

Tribal lenders say these state rules do not apply to them. Many states disagree, which is why availability varies by state.

If a lender offers you a payday-style loan

• Ask for the total of payments in dollars, not just the fee.
• Ask whether rollovers are allowed and what each one costs.
• Ask whether you can switch to an installment plan if you cannot pay on the due date.
• Read the dispute section of the agreement. Tribal loans usually require arbitration under tribal law.

Payday loan terms, explained

Finance charge

The dollar cost of the loan, usually quoted per $100 borrowed. On a payday loan it is often the only cost, which makes it easy to underestimate.

APR

The yearly cost, including fees. A two-week loan with a 15% fee has an APR near 391% because the fee repeats 26 times in a year.

ACH authorization

Your permission for the lender to pull payments from your checking account. You can revoke it, and your bank must honor a stop-payment request made at least three business days before a scheduled transfer.

Rollover or renewal

Paying a new fee to push the due date back. The principal does not shrink unless your state requires it.

Extended payment plan

A no-fee option some states require lenders to offer, letting you repay over several pay periods instead of rolling over.

What happens if you cannot repay on the due date

The lender will usually try to pull the payment anyway. If your account is short, your bank may charge a returned-payment fee, and some lenders retry the debit more than once. After that come late fees and collection calls. Before the due date, call the lender and ask for an extended payment plan or a new date. If you are being debited repeatedly, you can revoke the authorization with both the lender and your bank, though the debt itself remains. If you believe the loan breaks your state's law, file a complaint with your state attorney general or the CFPB. Our guide on getting out of a tribal loan walks through each step.

Payday and tribal loans for military members

The federal Military Lending Act caps the cost of most consumer credit, including payday and installment loans, at a 36% military annual percentage rate for active-duty service members and their dependents. Because tribal loans cost far more than that, many tribal lenders simply do not lend to military families. MaxLend, for example, states that it does not lend to active-duty service members, their spouses, or dependents. If you are in the military, your base's financial counselor and relief societies such as Army Emergency Relief, Navy-Marine Corps Relief Society, and Air Force Aid Society offer emergency help, often as interest-free loans or grants.

Frequently asked questions