The laws on payday loans vary from state to state. States fall into three basic groups:
- Indulgent States . In 28 states there are very few restrictions on payday loans. Lenders can request $ 15 or more for every $ 100 borrowed, and they can demand full payment from the borrower’s next payday. But even these states have a number of limits. Most impose a limit on how much money users can borrow – either a dollar amount or a percentage of the borrower’s monthly income. Also, a federal law prohibits lenders in all states from charging more than an annual rate of 36% (APR) to active duty members of the military. Many payday payers handle this law by refusing to grant loans to service members.
- Restricting States . In 15 states, plus Washington, DC, there are no payday loans at all. Some of these states have banned payday lending. Others have set a limit on interest rates – usually around 36% APR – making payday loans not profitable, so all payday loans are closed. However, borrowers in these states can still get loans from online payday borrowers.
- Hybrid states. The other eight states have an average level of regulation. Some maximum payday interest rate lenders can count on a lower rate – usually around $ 10 for every $ 100 borrowed. This amounts to more than 260% annual interest based on a two-week period, which is enough for payers payday to make a profit. Others limit the number of loans that each borrower can provide in a year. And finally, some states require longer terms for loans than two weeks. Colorado, for example, adopted a law in 2010 requiring all loans to have a minimum of six months. As a result, most payday borrowers in the state now allow borrowers to repay loans in installments, rather than as a lump sum.
The Pew report shows that in states with stricter laws fewer people take out payday loans. This is partly because stricter laws usually mean fewer payday loans, so people can’t just go to the nearest store for quick cash. People in restrictive states still have access to online lenders, but they are unlikely to use them more than people in permitted states.
In June 2016, the Consumer Protection Agency proposed a new rule to regulate payday lending at national level. This rule requires lenders to check borrowers’ income, expenses, and other debts to ensure that they can afford to repay the loan. It would also limit the number of loans that a borrower can take out in succession, thus breaking the debt cycle. And finally, it would require lenders to let borrowers know before they withdraw money from their bank accounts and limit the number of times they can try to withdraw money before they give up.
This rule is not yet in force, and many payday lenders hope that this will never happen. The CFSA issued a statement claiming that this rule would force payday lenders to stop. This in turn would cut off access to credit for millions of Americans.
However, Pew argues that there are ways to change the rules that make it easier for low-income Americans to get the credit they need. The problem is that the proposed rule does not. Instead, Pew would continue to let pay givers count on three-person interest rates, while it would be harder for banks to offer better, cheaper alternatives. Pew has proposed his own rule that would limit short-term loans, but would encourage long-term loans that are easier to repay.