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How Different States Govern Payday Loan Companies

Everyday people find themselves in many unique financial situations. While a select few don’t have to worry about making ends meet, most people struggle to pay bills on time, save a bit extra, and prepare themselves for unexpected emergencies.

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Across America, there are many sets of rules governing financial institutions – both federal and state. Particularly for neighborhood lenders, the range of laws and regulations protecting both businesses and consumers can vary considerably.

As such, understanding your personal consumer rights – as well as the rights of lenders – is integral in ensuring you have the ability to borrow money whenever needed, and at what rates and with what restrictions. In many communities, payday loan companies are the lifeline for working people – yet the rules that govern these companies vary from state to state.

Because of this, let’s take a look at the variance in law, restrictions, and requirements that payday loan companies must adhere to, depending on the states in which they operate.

The Broader Types of Payday Loan Regulations by State

With 50 states, the District of Columbia, and various territories comprising the United States, it’s easy to say that there is substantial variance in the regulation of payday loan companies. Minimal regulation exists at the federal level, meaning that the terms and conditions that these companies abide by are largely influenced by individual states and jurisdictions.

According to the Consumer Federation of America, there are three broader categories of regulation affect payday companies:

  • Lower-cost payday lending
  • Prohibited higher-cost payday lending
  • Permitted higher-cost payday lending

In states that authorize lower-cost payday lending, interest rates are often capped at certain percentages far below that of the national average. These states have enacted such measures to combat what they consider to be exorbitant interest rates that exceed the value of the loans provided. Three states (Maine, Oregon, and New Mexico) fall into this category.

States that provide access to prohibited higher-cost payday lending pursue policies that minimize the ability for payday companies to charge higher rates than what they consider to be reasonable. In all, roughly two-thirds (16 states plus D.C.) fall into this category. The laws and regulations in these states vary considerably, from regulating interest rates to prohibiting payday loan advances outright, there are many examples of states that have curtailed or outlawed various actions of payday lenders.

Most states, however, are grouped in the category of permitted higher-cost payday lending states. This applies to 31 states, including those in every region of the United States. In these states, there may be no restrictions on interest rates, applicant criteria or varying regulations on how many times in a given period borrowers may be allowed to borrow.

The Effects of Payday Loan Restrictions on Borrowers

While a variety of states have passed payday loan restrictions in an attempt to protect various communities, often overlooked is the effect these rules can have on borrowers. The Washington Post outlined in detail some of the effects that communities face when payday loan restrictions become too steep:

  • People in need of emergency cash could no longer access it same-day
  • Many payday companies providing loans abandoned communities, leaving them with no other access to credit or loans
  • Local businesses saw a decline in revenue as a result of these actions

Given that many payday loan companies operate in communities where banks and other traditional lenders refuse to operate, payday lenders are the only lifeline for loans desperately needed by millions of Americans. As such, restricting access to payday loans may needlessly complicate the borrowing process for those who would otherwise not receive approval for traditional loans.

Examples of Payday Laws by State

Given all we’ve discussed thus far and the impact that various regulations and restrictions can have on payday companies across the country, it’s a good idea to look at a few states in particular to see what payday laws exist and what documented effects have occurred as a result.

States That Never Allowed Payday Lenders

While payday lending is quite common throughout the United States, there are several states that have never allowed the practice. While many forms of small-scale, short-term lending solutions exist in every state, payday loans have never been legal in the following states:

  • Connecticut
  • Maryland
  • Massachusetts
  • Pennsylvania
  • Vermont
  • West Virginia

Additionally, the state of North Carolina allowed payday loans for a few years after previously not allowing them, but they allowed the law’s “sunset provisions” to go into effect, thereby once again returning to a system that does not allow payday lenders.
Georgia – Prohibits “Payday Companies”

One prominent example of a large state that outright outlaws payday lenders is Georgia. In specific terms, payday lending companies are illegal in the state and have been since 1955. However, variations of payday lenders are still present in Georgia. How is this possible?

Georgia offers licensing for what are known as industrial loan lenders and out-of-state FDIC insured banks. Through these entities, short-term loans based on paychecks are not illegal so long as the branch or branches present in the state do not receive a majority of the profits from the loan.

A licensed lender in the state of Georgia cannot charge more than 10% interest on a loan of $3,000 or less, making most reputable short-term lenders in Georgia accountable to borrowers. Civil penalties and/or jail time awaits those who violate interest laws on smaller payday loans.

Oregon – Allows Lower-Cost Payday Lending

Oregon is one of three states that do not ban payday lenders or significantly restrict their activities, but at the same time, regulates various elements such as interest rates allowed on loans.

Known as lower-cost payday lending, Oregon’s 4.2 million residents have access to a variety of payday loan companies. The maximum amount allowed by law to be borrowed cannot exceed $50,000, with a loan limit enforced that is not to exceed 25% of the borrower’s net monthly income if they earn less than $60,000 per year.

The maximum annual percentage rate (APR) on a payday loan in Oregon is 36%, with one-time fees also being capped to a maximum of $40.

Borrowers may also only initiate one payday loan per 7 days and no criminal penalties can be pursued for failure to repay a payday loan.

California – Allows Higher-Cost Payday Lending

Along with thirty other states, California is the norm with respect to payday lending procedures. The nation’s largest state – with 12% of US residents living there – sets many trends for business. It should be no surprise then that California’s model of payday lending fits more closely with the nation as a whole.

Despite allowing higher interest rates on its loans, California does still create various consumer protections for borrowers. Here are a few examples of what borrowers in California should know:

• The maximum amount that can be borrowed is $300; only $255 when including the maximum fee structure allowed by law
• Loans may not exceed 31 days in length
• Finance charges of up to $17.65 for a two-week loan of $100
• APR for two-week loans are capped at 459%

As is illustrated, even in states where substantially higher interest rates are allowed on payday loans, other restrictions may be put into place to reduce the total amount of interest that can be charged. This can be through limiting the amount that can be borrowed, restricting the number of loans a borrower may make or narrowing the time-frame during which a loan must be repaid.

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Other Examples of Payday Lending Restrictions

Across states that fall into all three broader categories of payday regulation, there are unique examples of restrictions placed – both on lenders and borrowers – that may benefit both parties.

For example, in the state of Washington, borrowers are only permitted to take out eight payday loans per year; once they’ve reached this limit, they will not be able to borrow until the next calendar year.

In South Dakota, voters approved a state-wide referendum that capped loan rates at a maximum of 36 percent on various installment loans, car loans, and payday loans.

Maine has capped payday loan interest rates at 30 percent but does allow other forms of lending with tiered fees that can increase the effective interest rate substantially.

In Pennsylvania, places that operate as check-cashing entities cannot offer payday loans.

Ultimately, borrowers owe it to themselves to carefully considering their lending options and make wise decisions. Payday loan companies offer meaningful finance solutions for communities that might otherwise lack traditional lending solutions, and the absence of these entities can disrupt local economies.

By being responsible with their financial decisions and only borrowing what is needed, borrowers can avoid any negative consequences or stereotypes associated with payday lending services.