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Payday loans are small, short-term cash advances that cover urgent (and frequently emergency) expenditures. They’re significantly criticized because of the high rates charged and their long-term influence on borrowers.
Despite their controversy, they appear to be viable for borrowers with bad credit and few alternatives to obtain money in an emergency.
The Concept behind payday loans
Payday loans (also officially named in different state legislations as credit advances, deferred deposit services or transactions, short-term loans, etc.) are:
- small cash ($100 – $500 on average);
- short-term loan products that are given for a period of 2 weeks on average (7 – 120 days depending on the state regulations);
- and should be repaid in full (loan amount plus interest) at the end of the agreed period.
Since the loans are short-term and unsecured (they do not presuppose any collateral), they also have very high-interest rates. The nature of the loan allows lenders to charge triple-digit APR rates that are much higher than usual rates for personal loans or credit cards. The average payday loan fee is $15 for every $100 borrowed, which equals nearly 400% APR. The maximum loan rates are regulated at a state level, depending on the location. Ideally, they should not exceed the allowed numbers; they almost always do in reality.
Unlike traditional bank personal loans, payday loans are easier and faster to get (often within a business day). They represent a very beneficial means to bridge the gap between paychecks. Unlike banks unwilling to grant a loan to a borrower with a poor credit record, payday lenders offer much more lenient terms to their customers in this respect. However, some states require lenders to check the prospective borrowers in the state databases to exclude the possibility of excessive lending practices.
Apart from excessive APR rates, many lenders also offer the option to renew or roll over the loan (if a borrower cannot repay in time). Renewal costs an additional fee. However, this is not what makes it wrong; the longer the loan is rolled over, the more significant is the interest over the term. This is, eventually, what leads to the situation when repayment becomes unaffordable and a borrower gets into the cycle of debt.
Small cash loans have historically been governed at the state level. The legal framework for a loan’s amount, interest rates, fees, and other circumstances is established by state legislation. At the present moment, each state regulates the operation of all payday lenders on their territory, and their laws are not homogeneous. Some states set more restrictive (and even prohibitive) measures about the industry; others are more lenient.
According to the National Conference of State Legislatures as of 2019:
- Fifteen states (and 5 U.S. territories) have restrictive laws. They do not permit payday lending in the state and require lenders to comply with consumer loans interest rate caps (commonly 36% APR usury cap). Arizona, Arkansas, Connecticut, District of Columbia, Georgia, Maryland, Massachusetts, Nebraska, New Jersey, New Mexico, New York, North Carolina, Pennsylvania, Vermont, and West Virginia. There are no payday loan stores in these states. Some states like DC banned payday loans long ago, in 2007, and the most recent state to repeal its payday lending statutes was Nebraska in 2020.
- 37 states have specific payday lending statutes and allow lenders to operate in the states on particular terms:
- Sixteen of them have very lenient regulations, and payday lenders operate here quite freely and can charge triple-digit APRs. Alabama, Alaska, Delaware, Florida, Idaho, Missouri, Nevada, North Dakota, Oregon, Rhode Island, South Carolina, South Dakota, Tennessee, Utah, Wisconsin, and Wyoming.
- Twenty states allow payday lending but under heavier regulations. They either impose rate caps, set restrictions on the number of loans a borrower can take, or require that multiple pay periods be allowed so that borrowers can repay. Currently, among the states that allow payday lending practices: Are California, Colorado, Hawaii, Illinois, Indiana, Iowa, Kansas, Kentucky, Louisiana, Maine, Michigan, Minnesota, Mississippi, Montana, New Hampshire, Ohio, Oklahoma, Texas, Virginia, and Washington.
- Ohio is the one with the most restrictive laws
- Idaho is the most relaxed.
Ohio used to be the winner in the nomination for having the highest prices for payday loans until 2018. That was possible because payday lenders could register as mortgage lenders.
They could go around the law since they had no competition and could therefore charge triple-digit interest rates as much as they pleased. Starting on April 27, 2019, if a business wishes to operate in Ohio, it must adhere to a 28 percent APR cap. There will be no more fooling around.
The Idaho Legislature, in particular, has shown little interest in regulating payday lending. The state currently has no restrictions on the duration or amount of finance charges that may be charged.
The maximum APR is not mentioned, either. The only condition is that the loan amount should not exceed $1,000 or 25% of an individual’s gross monthly income, with three rollovers permitted. Payday lending in Idaho is, therefore, no surprise.
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