Payday loans are legal in 27 states, and another 9 allow some type of short-term loan with restrictions. The remaining 14 and the District of Columbia prohibit the practice. Some states have aggressively pursued lenders that they believed violated their state laws. To protect their citizens from usurious payday loans, states have banned the product or set rate or usury limits. Lenders argue that high rates are necessary because payday loans are risky to finance.
Opponents of the Obama-era payday loan rule claim that the provisions on capacity to pay were too onerous and costly. They argue that the provisions on capacity to repay were simply unfeasible and imposed unreasonable levels of documentation on consumers and lenders, even more than what is required for mortgage lenders. Lynn DeVault, president of the American Community Financial Services Association, said Tuesday that the complex and costly regulations would have effectively left lenders out of business rather than protecting consumers. Payday loans are currently legalized in 37 states and are illegal in 13 states. The largest and most demanded payday loan states are Texas, Nevada and California.
Four other states have set some limits on interest rates on payday loans. These include Montana, New Hampshire, California, and South Dakota. Payday loans are a way for Americans to get cash immediately when they need it before payday. However, lenders have been criticized for being unfair to borrowers. In some states, payday loans and similar types of loans are completely prohibited.
New York State bans payday loans through its old criminal and civil usury laws. It is illegal for any lender to make payday loans, whether in person, over the phone or online. It is also illegal to collect payday loans in New York. In the 32 states that allow payday loans, borrowers can generally apply for one of these loans by going to a lender and providing valid identification, proof of income, and a bank account. However, some of these options are copies of payday loans and are slightly more expensive than traditional loans. A payday loan is a relatively small, high-cost loan that typically matures within two weeks and is made with a post-dated check from the borrower or with access to the borrower's bank account as collateral.
Borrowers are protected against costly payday loans through reasonable limits on low loan rates or other prohibitions in fifteen states. Among Americans who report losing income, 3% of respondents say they have had to borrow money with a payday loan, deposit advance or pawn shop loan. Most lenders offering payday loans require borrowers to pay a finance charge (service charges and interest) to get the loan, the balance of which is due two weeks later, usually the next payday. It is a violation of New York State law to make payday loans in person, over the phone or over the Internet. There are still predatory lenders working around legislation to offer illegal and unlicensed payday loans. In addition, the Military Loans Act sets a 36% rate for tax refund loans and certain payday loans and auto property loans to members of the armed forces who are on active duty and their insured dependents prohibit payday loans. Online payday lenders generally obey state licensing laws and the rate limits of the state in which the borrower obtains the loan. Borrowers have protections against high-cost payday loans with reasonable small loan rate limits or other prohibitions in fifteen states.
The collection limits detail the charges that lenders may charge if the loan is not repaid and if the lender can use or threaten to pursue criminal proceedings if a borrower is unable to pay the check used to obtain a loan. Last month, the Nebraskans for Responsible Lending coalition said they had gathered enough signed petitions to get an initiative that would limit the annual interest rate on payday loans to 36% on the November state ballot. Illegal states that currently completely ban payday loans include Vermont, New Jersey, Arizona, Connecticut, Georgia, Arkansas, Maryland, New Jersey, New York, Massachusetts and North Carolina, Columbia. New York and New Jersey Ban Payday Loans Through Criminal Usury Statutes, Limiting Loans to 25 Percent and 30 Percent Annual Interest Respectively.