Payday Loans in the United States

Note: explore also the entry about Bad Credit Payday Loans here.

Introduction

The confluence of some historical trends has led to the development of markets offering what are commonly referred to as payday loans (also known as cash advance loans, deferred deposit, and deferred presentment loans depending on lender and State law terminology), and short-term vehicle title loans that are much shorter in duration than vehicle-secured loans that have traditionally been offered by storefront installment lenders and depository institutions. Although payday loans initially were distributed through storefront retail outlets, they are now also widely available on the internet. Vehicle title loans are typically offered exclusively at storefront retail outlets. a number of large payday lenders also offer vehicle title and installment loans.

According to the Pew Charitable Trusts, though “federal law remains mostly silent about payday lending, this situation is changing. The Talent Amendment to the 2007 defense authorization bill sought to protect military families from payday lending. This federal law enacted a first-of-its-kind, 36 percent interest rate limit on payday loans provided to military service members and their immediate relatives. Moreover, the Dodd-Frank Wall Street Reform and Consumer Protect Act of 2010 created the Consumer Financial Protection Bureau (CFPB) and provided the new agency with the authority to regulate payday loans generally.”

Storefront Payday Loans

The market that has received the greatest attention among policy makers, advocates, and
researchers is the market for single-payment payday loans. These payday loans are short-term
small-dollar loans generally repayable in a single payment due when the consumer is scheduled
to receive a paycheck or other inflow of income (e.g., government benefits). For most
borrowers, the loan is due in a single payment on their payday, although State laws with
minimum loan terms—seven days for example—or lender practices may affect the loan duration in individual cases. Some refer to these short-term payday loans available at retail
locations as “storefront payday loans,” but the requirements for borrowers taking online payday
loans are generally similar, as described below.

There are now 36 States that either have created a carve-out from their general usury cap for payday loans or have no usury caps on consumer loans. The remaining 14 States and the District of Columbia either ban payday loans or have fee or interest rate caps that payday lenders apparently find too low to sustain their business models. As discussed further below, several of these States previously had authorized payday lending but subsequently changed their laws.

Product definition and regulatory environment

Payday loans are typically repayable in a single payment on the borrower’s next payday. In order to help ensure repayment, in the storefront environment the lender generally holds the borrower’s personal check made out to the lender—usually post-dated to the loan due date in the amount of the loan’s principal and fees—or the borrower’s authorization to electronically debit the funds from her checking account, commonly known as an automated-clearing house (ACH) transaction.

Payday loan sizes vary depending on State law limits, individual lender credit models, and borrower demand. Many States set a limit on payday loan size; $500 is a common loan limit
although the limits range from $300 to $1,000.

Rollovers or Extensions

A rollover occurs when, instead of repaying the loan in full at maturity, the consumer pays only the fees due and the lender agrees to extend the due date. We use here the term “rollover” (see more in this legal Encyclopedia) but this practice is sometimes described under State law or by lenders as a “renewal” or an “extension.”

Repayment

Twenty States require payday lenders to offer extended repayment plans (see more) to borrowers who encounter difficulty in repaying payday loans. Some States’ laws are very general and simply provide that a payday lender may allow additional time for repayment of a loan.

Payday Lending by State

From the Consumer Fed’n of America and other surces:

Prohibition of Extremely High Cost Payday Lending

In Georgia, payday lending is explicitly prohibited and a violation of racketeering laws. New York and New Jersey prohibit payday lending through their criminal usury statutes, limiting loans to 25 percent and 30 percent annual interest, respectively. The Arkansas Supreme Court ruled in 2008 that the state Check Cashers Act, which purported to authorize high-cost payday lending, violated the state’s constitutional usury cap. Almost all payday lending halted in Arkansas due to enforcement by the Attorney General and private litigation. In 2010 voters adopted a 17% annual rate cap for consumer credit under the state constitution. In 2011 the Arkansas legislature repealed the Check Cashers Act that had authorized payday lending.

Payday lending is not specifically authorized and is defacto prohibited by several state small loan rate caps. These states includeArizona, Connecticut, Maryland, Massachusetts, North Carolina, Pennsylvania, Vermont, West Virginia, and the District of Columbia. Of those jurisdictions, the District of Columbia, Arizona, and North Carolina repealed or sunset their payday loan authorization laws.

Five states permit loans based on checks held for deposit but at a much lower rate than typical payday lending. The MaineUniform Consumer Credit Code caps interest at 30 percent for small loan companies but permits tiered fees that result in 261 percent APR for a two-week $250 loan. Oregon permits a one-month minimum term payday loan at 36 percent interest plus a $10 per $100 borrowed initial loan fee. As a result, a $250 one-month loan costs 154 percent APR for the initial loan, and 36 percent APR for any subsequent loans. New Hampshire capped payday loan rates at 36 percent APR, effective in 2009. The lowest-cost payday loan law was enacted by Ohio in 2008, capping rates at 28 percent APR. Ohio voters in late 2008 soundly rejected an industry ballot initiative to restore 390 percent annual rates. Montana voters overwhelmingly passed a ballot initiative in 2010 to cap small loan rates at 36 percent APR, effective in 2011.

Colorado amended its payday loan law in 2010 to set a minimum six-month term for loans based on unfunded checks held by the lender. A payday loan in Colorado may include charges of 45 percent per annum interest, a monthly maintenance fee of 7.5 percent per month after the first month, and a tiered system of finance charges, with 20 percent for the first $300 borrowed, and an additional 7.5 percent for amounts from $301 to $500. Loans can be prepaid at any time or repaid in installments or one lump sum.

Some States Authorize High-Cost Payday Lending

Thirty-two states enacted safe harbor legislation for payday lenders and permit loans based on checks written on consumers’ bank accounts at triple digit interest rates, or with no rate cap at all. These states include: Alabama, Alaska, California,Delaware, Florida, Hawaii, Idaho, Illinois, Indiana, Iowa, Kansas, Kentucky, Louisiana, Michigan, Minnesota, Mississippi, Missouri, Nebraska, Nevada, New Mexico, North Dakota, Oklahoma, Rhode Island, South Carolina, South Dakota, Tennessee, Texas, Utah, Virginia, Washington, Wisconsin, and Wyoming.

Of the States that expressly authorize payday lending, Rhode Island has the lowest cap at 10 percent of the loan amount. Florida has the same fee amount but also allows a flat $5 verification fee. Oregon’s fees are $10 per $100 capped at $30 plus 36 percent interest. Some States have tiered caps depending on the size of the loan. Generally, in these States the cap declines with loan size. However, in Mississippi, the cap is $20 per hundred for loans under $250 and $21.95 for larger loans (up to the State maximum of $500). Seven States do not cap fees on payday loans or are silent on fees (Delaware, Idaho, Nevada, South Dakota, Texas (no cap on credit access business fees), Utah, and Wisconsin).

Depending on State law, the fee may be referred to as a “charge,” “rate,” “interest” or other similar term. R.I. Gen. Laws § 19-14.4-4(4), Fla. Stat. § 560.404(6), Or. Rev. Stat. § 725A.064(1)-(2), Miss. Code Ann. § 75-67-519(4), Del. Code Ann. tit. 5, § 2229, Idaho Code Ann. § 28-46-412(3), S.D. Codified Laws § 54-4-44, Tex. Fin. Code Ann. § 393.602(b), Utah Code Ann. § 7-23-401, Wis. Stat. § 138.14(10) (a).

Payday Loans and the State Laws

Select from the list of U.S. States below for state-specific information on Payday Loans:

Payday Loans

Payday Loans in the United States

Introduction

Storefront Payday Loans

Product definition and regulatory environment

Rollovers or Extensions

Repayment

Payday Lending by State

Prohibition of Extremely High Cost Payday Lending

Some States Authorize High-Cost Payday Lending

Payday Loans and the State Laws

Resurces

See Also

Further Reading

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