Definition
Payday loans are short-term, high-interest loans, typically for amounts under $500, that are available to borrowers who need cash quickly. They are generally repaid in a single lump sum payment on the borrower’s next payday. Payday loans are also known as cash advances, payday advances, deferred deposits, or post-dated check loans.
Types
Payday loans can come in two forms: installment loans and single-payment loans. Installment loans are paid back in multiple payments over time and may have lower interest rates than single-payment loans. Single-payment loans are due in full on the borrower’s next payday and typically have higher interest rates.
Cost
Payday loans can have high interest rates and fees, which can make them expensive. The average annual percentage rate (APR) on a payday loan is typically 400 percent or more. In addition to interest and fees, payday loans can have other associated costs, such as transaction fees, late fees, and check-cashing fees.
Payday loan regulations exist to protect consumers from predatory lending practices. These regulations are designed to limit excessive fees, interest rates, and other costs associated with payday loans. They also protect borrowers from deceptive and unfair practices, such as lenders who attempt to collect more than what is owed.
Consumer Financial Protection Bureau (CFPB)
The consumer Financial Protection Bureau (CFPB) is responsible for enforcing federal consumer protection laws. The CFPB has proposed a rule that would require lenders to assess borrowers’ ability to repay payday loans and limit the number of times a borrower can renew or rollover a loan.
National Credit Union Administration (NCUA)
The National Credit Union Administration (NCUA) regulates federal credit unions. The NCUA has proposed a rule that would limit the types of loans federal credit unions can offer, as well as impose certain restrictions on the terms of payday loans offered by federal credit unions.
Many states have adopted their own regulations on payday loans. These regulations vary from state to state, but they generally include:
Maximum Loan Amounts
Many states limit the amount of money that can be borrowed in a payday loan. These limits are typically between $500 and $1,000.
Maximum Loan Terms
States may also limit the length of time a borrower can take out a payday loan. These terms may range from two weeks to six months.
Interest Rate Limits
Many states limit the interest rate that can be charged on payday loans. These limits may be as low as 10 percent or as high as 36 percent.
Payment Plan Requirements
Some states require lenders to offer borrowers payment plans that allow them to pay back their loans over time. These payment plans may allow borrowers to make smaller monthly payments or extend the loan term.
Rollover Limitations
Rollovers are when a borrower extends the loan term by paying only the interest due on the loan and rolling the remaining balance into a new loan with a new term. Some states limit the number of times a borrower can rollover a loan.
Cooling-off Periods
Some states require lenders to give borrowers a “cooling-off” period, which is a set amount of time between loans. This gives borrowers time to assess their financial situation and determine if taking out another loan is necessary.
Collection Limitations
Lenders are prohibited from engaging in certain practices when collecting on payday loans. These practices may include harassment, threats of criminal prosecution, and the use of false or misleading statements.
Database Laws
Some states have established databases to monitor payday loan usage. These databases help to ensure that borrowers are not taking out more payday loans than they can afford to repay.
Prohibited Practices
Many states prohibit lenders from engaging in certain practices, such as offering loans to borrowers who have already taken out multiple payday loans. These laws are designed to protect borrowers from taking out loans they cannot afford to repay.
It is important for lenders to comply with the applicable federal and state payday loan regulations. Failure to do so can result in civil penalties and criminal prosecution.
Borrowers should consider alternatives to payday loans, such as credit counseling, small-dollar loans, or budgeting and saving. These alternatives can help borrowers avoid taking out a loan they cannot afford to repay.
Payday loan regulations exist to protect consumers from predatory lending practices. Federal and state regulations limit the fees, interest rates, and other costs associated with payday loans. It is important for lenders to comply with these regulations, as failure to do so can result in civil penalties and criminal prosecution. Borrowers should consider alternatives to payday loans to help avoid taking out a loan they cannot afford to repay.
Consumer Financial Protection Bureau. (2020). Payday loans and deposits advance loans: What you need to know. Retrieved from https://www.consumerfinance.gov/consumer-tools/payday-loans-deposit-advance-loans/
National Conference of State Legislatures. (2020). State payday lending laws. Retrieved from https://www.ncsl.org/research/financial-services-and-commerce/state-payday-lending-laws.aspx
Commonly Asked Questions
How are payday loans regulated?
Payday loans are small loans subject to state regulation. Traditionally states have capped small loan rates at 24 to 48 percent annual interest and required installment repayment schedules. Many states also have criminal usury laws to protect consumers.
Are payday lenders regulated?
Federal regulation
The Dodd-Frank Wall Street Reform and Consumer Protection Act gave the Consumer Financial Protection Bureau (CFPB) specific authority to regulate all payday lenders, regardless of size.
Which state has it right when it comes to regulating payday loans?
Since 2010, four states-Colorado, Hawaii, Ohio, and Virginia-have passed comprehensive payday loan reforms, saving consumers millions of dollars in fees while maintaining broad access to safer small credit.
Are payday loans regulated by the fca?
The FCA rules that payday loan lender firms must take reasonable steps to ensure they are aware of the borrower’s income and expenditure before offering them credit or increasing their credit limit.
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