Covered Loans in the United States

Covered loans are typically used by consumers who are living paycheck to paycheck, have little
to no access to other credit products, and seek funds to meet recurring or one-time expenses.

Consumer Protections for payday loans, vehicle title loans, and certain high-cost installment loans

Payday loans, vehicle title loans, and certain high-cost installment loans are called, collectively, “covered loans”.

Lenders that make covered loans have developed business models that deviate substantially from the practices in other credit markets by failing to assess consumers’ ability to repay their loans and by engaging in harmful practices in the course of seeking to withdraw payments from consumers’ accounts. Many consumers struggle to repay their loans. In particular, many consumers who take out covered loans appear to lack the ability to repay them and face one of three options when an unaffordable loan payment is due: take out additional covered loans, default on the covered loan, or make the payment on the covered loan and fail to meet other major financial obligations or basic living expenses. Many lenders may seek to obtain repayment of covered loans directly from consumers’ accounts.

The largest category of short-term loans are “payday loans,” which are generally required to be repaid in a lump-sum single-payment on receipt of the borrower’s next income payment, and short-term vehicle title loans, which are also almost always due in a lump-sum single-payment, typically within 30 days after the loan is made. The Dodd-Frank Act does not define “payday loans.”

The second general category consists of certain higher-cost longer-term loans. It includes
both what are often referred to as “payday installment loans”—that is, loans that are repaid in
multiple installments with each installment typically due on the borrower’s payday or regularly scheduled income payment and with the lender generally having the ability to automatically
collect payments from an account into which the income payment is deposited—and vehicle title installment loans. In addition, the latter category includes higher cost, longer-term loans in
which the principal is not amortized but is scheduled to be paid off in a large lump sum payment after a series of smaller, often interest-only, payments.