Are Payday Loan Systems Legal?
Payday systems are legal and regulated in thirty seven states, but in fifteen states it is not feasible or illegal given the state laws. The fifteen states where it is not feasible or illegal include:
- Arizona
- Connecticut
- Arkansas
- Georgia
- Colorado
- Maryland
- Maine
- Massachusetts--it is not strictly illegal in this state, but is highly regulated
- New Hampshire
- New Jersey
- North Carolina
- New York
- Vermont
- Pennsylvania
- West Virginia
Payday loans are a growing industry in the United States and the regulation of these lending institutions are handled by the individual states. In the United States the finance charges on these payday loans will typically be in the range of fifteen to thirty percent of the amount that is borrowed over the two week period. This averages out from three hundred ninety to seven hundred eighty in annual percentage rates.
Although payday loans are not explicitly banned there are laws that do prohibit the payday lending industry from charging excessive interest rates. The interest rate caps are strictly calculated by the annual percentage rate. Beginning in 2007 there has been a federal law in effect that capped the interest rate on payday loans for military personnel to a maximum of thirty-six percent annual percentage rate that is defined by the Secretary of Defense.
The way that the payday loan process works ins that if the borrower cannot pay back the amount they borrowed, the payday loan company has the right to deposit the check into the borrower's account where it may bounce causing bounced check fees. To help solve this problem the members in the national trade association are required to offer a payment plan that will extend the payments due on the load for no additional costs. Extended payment plans are required by state law in some other states, including Washington.
When it comes to what fees can be charged on a payday loan only those that are permitted by law and the disclosure of these fees to the borrower is required by the federal Truth in Lending Act. There are some states that do have laws in effect that limit the number of loans that a borrower can take out at one time. One way that a payday loan company can keep track of how many loans a borrower has out at one time is currently done by using a single statewide real time database in each state.
This type of system is currently required in Michigan, Florida, Illinois, North Dakota, New Mexico, Indiana, South Carolina, Virginia, and Okalahoma. This system requires all licensed payday lenders to conduct a real time verification of the borrower's eligibility to get a loan before conducting the loan processes.
In Virginia, the state laws cap the number of loans that a borrower can get each year. They may also require that after a certain number of loan renewals the payday lender has to offer a lower interest loan with a longer time before it is due so the borrower can get out of debt cycle. Payday loans are primarily regulated at the state level.