How are Payday Loans Regulated?
Payday loans are short term in nature, based on the amount of the check that a borrower writes, or their deposit amount. A payday loan can range from $100 to $1000, and most have a term of about two weeks. Payday lenders typically charge higher than normal interest rates; these loans are legal in thirty-five states, but many states have passed tighter restrictions on payday loan practices. This guide will outline the regulations governing payday lenders, as well as those meant to protect borrowers.
A person can qualify for a payday loan if they have an open checking account, proof of stable income and proper identification. Unlike personal loans, payday loans come with no credit check requirement. The lender isn't concerned with the borrower's ability to repay the loan.
In days gone by, payday loan outlets charged interest rates that bordered on usury because they were often the poor borrower's only option when quick cash was needed. Some US states viewed this as unfair and excessive, passing laws to restrict these practices. For example, the state of Indiana passed legislation capping the interest that a lender can assess. A $100 payday loan cannot have more than a $15 finance charge if it has a two week term. For amounts over one hundred dollars, the lender can only charge an amount equal to ten percent of the balance. Fourteen other states have passed similar laws- expect to pay anywhere from 15-25% interest on a two-week loan.
If we may believe the info on Personal-Finance-Information.com, there are some states that prohibit the automatic deferral (rolling over) of a payday loan. However, these laws are rife with loopholes, leading some unscrupulous lenders to rewrite the loans as new. That led three states to completely outlay payday loans, but most states allow lenders to renew them if the borrower has demonstrated a willingness and ability to pay the loan off.
Back in 2007, the US government imposed stringent rules on payday loans offered to military personnel. The law limited APR to 36%, and made it so military borrowers would not have to provide a postdated check or provide access to their checking account. By 2008's end, the industry said that there were almost $35 billion in loans made. The payday loan industry has seen widespread growth, despite the laws designed to restrict it. Most financial experts expect the growth, as well as attempts to contain it, to continue.