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."Michelle Hodson ,fdic.gov, November 18, 2009, How Payday Loans Work 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 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.
Federal regulation
The federal government regulates payday loans because of: (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.
The federal Truth in Lending Act of 1968 requires various disclosures, including all fees and payment terms.
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.
In 2017, the CFPB issued a rule that payday, automobile title, and other lenders check to see if borrowers could afford to repay high-interest loans before issuing them. It revoked this rule in 2020, but retained other requirements.Payday Lending Rule
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 to aggressively 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.
State and district regulation 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. Some states have aggressively pursued lenders they felt violate their state laws.
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.
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.
Regulation in New Mexico
New Mexico caps fees, restricts total loans by a consumer and prohibits immediate loan rollovers, in which a consumer takes out a new loan to pay off a previous loan, under a law that took effect November 1, 2007. A borrower who is unable to repay a loan is automatically offered a 130-day payment plan, with no fees or interest. Once a loan is repaid, under the new law, the borrower must wait 10 days before obtaining another payday loan. The law allows the term of a loan to run from 14 to 35 days, with the fees capped at $15.50 for each $100 borrowed 58-15-33 NMSA 1978. There is also a 50-cent administrative fee to cover costs of lenders verifying whether a borrower qualifies for the loan, such as determining whether the consumer is still paying off a previous loan. This is accomplished by verifying in real time against the approved lender compliance database administered by the New Mexico regulator. The statewide database does not allow a loan to be issued to a consumer by a licensed payday lender if the loan would result in a violation of state statute. A borrower's cumulative payday loans cannot exceed 25 percent of the individual's gross monthly income.Forbes.com: NM Governor Signs Payday Lenders Bill
In 2017, the New Mexico Legislature banned payday loans.
Withdrawal from North Carolina
In 2006, the North Carolina Department of Justice announced the state had negotiated agreements with all the payday lenders operating in the state. The state contended that the practice of funding payday loans through banks chartered in other states illegally circumvents North Carolina law. Under the terms of the agreement, the last three lenders will stop making new loans, will collect only principal on existing loans and will pay $700,000 to non-profit organizations for relief.North Carolina Declares Victory In War On Payday Lending
Operation Sunset in Arizona
Arizona usury law prohibits lending institutions to charge greater than 36% annual interest on a loan. On July 1, 2010, a law exempting payday loan companies from the 36% cap expired. State Attorney General Terry Goddard initiated Operation Sunset, which aggressively pursues lenders who violate the lending cap. The expiration of the law caused many payday loan companies to shut down their Arizona operations, notably Advance America.
Regulation in Illinois
On March 23, 2021, Gov. J. B. Pritzker signed an interest cap of 36% on loans from payday lenders in Illinois.
Proposed postal banking
Some countries offer basic banking services through their postal systems. The United States Post Office Department offered such a service in the past – the United States Postal Savings System. It was discontinued in 1967. In January 2014 the Office of the Inspector General of the United States Postal Service issued a white paper suggesting that the USPS could offer banking services, to include small dollar loans for under 30% APR. Both support and criticism quickly followed, however the major criticism isn't that the service would not help the consumer but that the payday lenders themselves would be forced out of business due to competition and the plan is nothing more than a scheme to support postal employees.
According to some sources the USPS Board of Governors could authorize these services under the same authority with which they offer money orders now.
Industry growth
19th century salary lenders
In the early 1900s some lenders participated in salary purchases. Salary purchases are where lenders buy a worker’s next salary for an amount less than the salary, days before the salary is paid out. These salary purchases were early payday loans structured to avoid state usury laws.
20th century check cashing
As early as the 1930s check cashers cashed post-dated checks for a daily fee until the check was negotiated at a later date. In the early 1990s, check cashers began offering payday loans in states that were unregulated or had loose regulations. Many payday lenders of this time listed themselves in yellow pages as "Check Cashers."
1990s to present
Banking deregulation in the late 1980s caused small community banks to go out of business. This created a void in the supply of short-term microcredit, which was not supplied by large banks due to lack of profitability. The payday loan industry sprang up in order to fill this void and to supply microcredit to the working class at expensive rates.
In 1993, Check Into Cash was founded by businessman Allan Jones in Cleveland, Tennessee. This business model was made possible after Jones donated to the campaigns of legislators in multiple states, convincing them to legalize loans with such high interest rates.
Subsequently, the industry grew from fewer than 500 storefronts to over 22,000 and a total size of $46 billion. This number has risen even higher over the years. By 2008 payday loan stores nationwide outnumbered Starbucks shops and McDonald's fast food restaurants.
Deregulation also caused states to roll back usury caps, and lenders were able to restructure their loans to avoid these caps after federal laws were changed.
State and federal regulation on growth The Consumer Financial Protection Bureau, in a June 2016 report on payday lending, found that loan volume decreased 13% in Texas after the January 2012 disclosure reforms. The reform required lenders to disclose "information on how the cost of the loan is impacted by whether (and how many times) it is renewed, typical patterns of repayment, and alternative forms of consumer credit that a consumer may want to consider, among other information". The report cites that the decrease is due to borrowers taking fewer loans rather than borrowing smaller amounts each time. Re-borrowing rates slightly declined by 2.1% in Texas after the disclosure law took effect. The Consumer Financial Protection Bureau has proposed rulemaking in June 2016, which would require payday lenders to verify the financial situation of their customers, provide borrowers with disclosure statements prior to each transaction, and limit the number of debt rollovers allowed, decreasing the industry by 55 percent. Another option would allow the lender to skip the ability to repay assessment for loans of $500 or less, but the lender would have to provide a realistic repayment schedule and limit the number of loans lent over the course of a year.
Debt rollover