Earlier this month, two class action lawsuits were filed against banks in states where payday loans are illegal. The banks were accused of providing payday loan companies with access to online payment processing systems that allowed them to debit loan payments from bank customers’ accounts. Plaintiffs in the lawsuits allege that, as the banks are operating in states where payday loans are prohibited, their actions are illegal.
The regulation of payday loan companies remains a state-by-state issue.
Payday loans are short-term loans guaranteed by a personal check written by the borrower. The check is held by the loan company until payday, when it can either be deposited at a bank and the amount debited from the borrower’s account, or redeemed by the borrower for the cash amount. Borrowers can also pay a finance charge and roll the loan over to a future date. The requirements to get a payday loan are incredibly relaxed – often only a bank account and a steady income are needed. The unusually high interest rates and finance charges associated with these loans, however, can easily result in a vicious cycle if consumers are unable to make lump sum payments. The allegedly unfair rates, along with allegations of coercive collection tactics by some companies, have prompted several states to regulate or ban the practice entirely.
As payday loan companies move increasingly online, some consumers may be confused about which states allow or limit payday loans.
Payday Loans in the United States
|State||Payday Loan Status||Further Info|
|Georgia, New York, New Jersey, Arkansas||Prohibited||New York and New Jersey limit annual loan interest rates to 25 and 30 percent respectively, and prohibit payday lending. Arkansas enacted a 17% annual rate cap in 2010.|
|Arizona, Connecticut, Maryland, Massachusetts, North Carolina, Pennsylvania, Vermont, West Virginia, DC||Prohibited by existing laws and caps||DC and North Carolina have repealed laws that previously approved payday loans|
|Maine, Ohio, Oregon, New Hampshire, Montana||Allowed based upon personal checks but interest rates are limited||Maine – 30% cap on small loans, though tiered fees permitted Oregon – 36% cap on one-month minimum term loans, plus fees New Hampshire – 36% cap Ohio – 28% cap Montana – 36% cap|
|Colorado||Allowed with restrictions||Minimum six-month term for loans guaranteed by check. 45% annual interest allowed, plus fees, included 7.5% maintenance fee after one month, and 20% on first $300. 7.5% permitted on further amounts below $500.|
|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.||Payday loans permitted without restriction|
Consumers continue to take legal action against certain payday loan companies and bank-offered payday loans, accusing them of charging excessive interest rates and employing deceptive business practices. For now, however, the regulation of payday loan companies remains a state-by-state issue, and consumers should ensure they fully understand the terms of any personal loan before entering into an agreement.