Payday loans are a type of short-term loan that can be used to cover unexpected expenses or bridge the gap between paychecks. However, due to the high interest rates associated with these loans, many states have taken steps to protect their citizens from usurious payday loans by banning the product or setting rate or usury limits. Usury is the practice of charging excessive and unreasonable interest rates, and it is illegal in many states. To avoid usury, some jurisdictions limit the annual percentage rate (APR) that any lender, including payday lenders, can charge.
Some jurisdictions prohibit payday loans altogether, while others have very few restrictions on payday lenders. The problem lies in the definition of a short-term loan. For example, the law regulates payday loans of 91 days or less; to avoid this, lenders may offer loans a little longer than 91 days. The Consumer Financial Protection Bureau (CFPB) issued a final rule on payday loans that rescinded Obama-era provisions that would have required lenders to ensure that borrowers could repay their loans before issuing cash advances.
Payday loans are the most common type of loan offered in 22 states and the only one offered in 13 of them. A loan agreement under this subchapter may provide for an interest charge calculated using the actual daily earnings method or the scheduled installment earnings method that does not exceed the equivalent rate or actual repayment of the installment account handling fee during the original scheduled term of the loan. These loans also require four payments spread over the loan period rather than a single payment at the end. If a loan under this section has an initial term of less than one month, the lender may earn a minimum of the acquisition fee and an interest charge that produces the same effective return as the installment management fee calculated at a daily rate during the term the loan is outstanding. In addition to state regulations, federal agencies should support state reform efforts by avoiding one-time payment lending domestically, curbing other harmful credit practices and ensuring that various providers, including payday lenders, consumer finance companies, financial technology companies, banks and credit unions, offer more secure services, cost installment lending rather than lending with global payments. Thirty-two states have enacted legislation authorizing payday loans, failed to close loopholes exploited by industry to provide high-cost loans, or liberalized interest rate caps on small loans.
Among those that allow payday loans, 16 states and the District of Columbia have implemented provisions limiting interest rates to 36%, while other states have imposed other lending restrictions on payday loans. The Dodd-Frank Wall Street Reform and Consumer Protection Act gave the Bureau of Financial Consumer Protection (CFPB) special powers to regulate all payday lenders regardless of the size of the payday loan.
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