A payday loan (also called a payday advance, salary loan, payroll loan, small dollar loan, short term, or cash advance loan) is a small, short-term unsecured loan, «regardless of whether repayment of loans is linked to a borrower’s payday.» The loans are also sometimes referred to as «cash advances,» though that term can also refer to cash provided against a prearranged line of credit such as a credit card. Payday advance loans rely on the consumer having previous payroll and employment records. Legislation regarding payday loans Apply varies widely between different countries and, within the United States, between different states.
To prevent usury (unreasonable and excessive rates of interest), some jurisdictions limit the annual percentage rate (APR) that any lender, including payday lenders, can charge. Some jurisdictions outlaw payday lending entirely, and some have very few restrictions on payday lenders. In the United States, the rates of these loans were formerly restricted in most states by the Uniform Small Loan Laws (USLL), with 360%-400% APR generally the norm.
Payday lending is legal in 27 states, with 9 others allowing some form of short term storefront lending with restrictions. The remaining 14 and the District of Columbia forbid the practice. Federal regulation against payday loans is primarily due to several reasons: (a) significantly higher rates of bankruptcy amongst those who use loans (due to interest rates as high as 1000%); (b) unfair and illegal debt collection practices; and (c) loans with automatic rollovers which further increase debt owed to lenders.
As for 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. Also, the Military Lending Act imposes a 36% rate cap on tax refund loans and certain payday and auto title loans made to active duty armed forces members and their covered dependents, and prohibits certain terms in such loans.
The CFPB has issued several enforcement actions against payday lenders for reasons such as violating the prohibition on lending to military members and aggressive collection tactics.
The CFPB also operates a website to answer questions about payday lending. In addition, some states have aggressively pursued lenders they felt violate their state laws.
Payday lenders have made effective use of the sovereign status of Native American reservations, often forming partnerships with members of a tribe to offer loans over the internet which evade state law. However, the Federal Trade Commission has begun aggressively to monitor these lenders as well. While some tribal lenders are operated by Native Americans, there is also evidence many are simply a creation of so-called «rent-a-tribe» schemes, where a non-Native company sets up operations on tribal land.
Some states have laws limiting the number of loans a borrower can take at a single time according to LATimes report. This is currently being accomplished by single, statewide realtime databases. These systems are required in Florida, Michigan, Illinois, Indiana, North Dakota, New Mexico, Oklahoma, South Carolina, and Virginia States Statues. These systems require all licensed lenders to conduct a real time verification of the customer’s eligibility to receive a loan before conducting a loan. Reports published by state regulators in these states indicate that this system enforces all of the provisions of the state’s statutes. Some states also cap the number of loans per borrower per year (Virginia, Washington), or require that after a fixed number of loan renewals, the lender must offer a lower interest loan with a longer term, so that the borrower can eventually get out of the debt cycle by following some steps. Borrowers can circumvent these laws by taking loans from more than one lender if there is not an enforcement mechanism in place by the state. Some states allow that a consumer can have more than one loan outstanding (Oklahoma). Currently, the states with the most payday lenders per capita are Alabama, Mississippi, Louisiana, South Carolina and Oklahoma.
States which have prohibited payday lending have reported lower rates of bankruptcy, a smaller volume of complaints regarding collection tactics, and the development of new lending services from banks and credit unions.
In the US, the Truth in Lending Act requires various disclosures, including all fees and payment terms.
Regulation in the District of Columbia
Effective January 9, 2008, the maximum interest rate that payday lenders may charge in the District of Columbia is 24 percent, which is the same maximum interest rate for banks and credit unions. Payday lenders also must have a license from the District government in order to operate.
Banning in Georgia
Georgia law prohibited payday lending for more than 100 years, but the state was not successful in shutting the industry down until the 2004 legislation made payday lending a felony, allowed for racketeering charges and permitted potentially costly class-action lawsuits. In 2013 this law was used to sue Western Sky, a tribal internet payday lender