Payday loans have the reputation of carrying very high interest rates which can be expensive for borrowers, however, in many states, this is often not the case.
Several states have moved to limit payday loan interest rates in an effort to protect consumers from getting in over their heads with these traditionally high-cost loans.
Price caps for payday loans are governed by state laws and were implemented to reduce the risk of predatory lending practices.
In the above map, you can see the rates of interest on payday loans, sorted by state, based upon a $300 loan.
- The red states indicate a state which has looser interest rate price caps;
- The yellow states indicate states have slightly stronger regulations on payday loans;
- The blue states either ban payday loans outright, or have much stronger regulation in place against payday loans.
What is a Payday Loan Interest Cap?
A payday loans interest cap is essentially a limit on how much interest lenders are allowed to charge borrowers who apply to take out a payday loan.
The goal of an interest cap is to protect borrowers from excessively high interest rates in an attempt to make loans more affordable and also to deter lenders from predatory lending.
Interest caps mean that loan companies are less likely to profit from borrowers and they can receive more protection and can save significant amounts when they borrow money online.
Where are Payday Loans Legal and Illegal?
Every state has different laws and statutes surrounding payday lending. This is because it depends on how each consumer protection office handles high-risk borrowing.
Thirty-seven states authorize payday lending through specific statutes including Alabama, Colorado, California, Illinois, Indiana, Iowa, Kentucky, Louisiana, Maryland, Ohio, Tennessee, Texas.
High-cost payday lending is permitted by state laws or regulations in thirty-two states. Borrowers have protections from high-cost payday lending with reasonable small loan rate caps or other prohibitions in fifteen states. In three states, there are lower rate caps or longer duration terms for less expensive loans. Online payday lenders are usually subject to the state licensing laws and rate caps of the state in which the borrower receives the loan.
The states that currently prohibit payday lending are Arizona, Arkansas, Connecticut, Georgia, Maryland, Massachusetts, New Jersey, New York, North Carolina, Pennsylvania, Vermont, West Virginia, and the District of Columbia.
What is the Payday Loan Interest Cap in My State?
In the states where payday loans are legal, the interest cap can vary, depending on the state you reside in, as it is often up to local governments to deal with regulation on financial products, as opposed to the federal government.
The table below indicates the maximum interest rate for the states where payday loans are legal – and Dime Alley operates out of all of these states:
Why Are There Price Caps on Payday Loans?
One of the main dangers of payday loans for bad credit is how easy they can be for borrowers to obtain. Within recent years, especially due to the financial impact of the coronavirus pandemic, the volume of people seeking out payday loans has tripled.
The eligibility requirements are relatively easy to pass as well. You just need;
- To be over 18,
- To be a US citizen, living in a state where payday loans are legalized,
- To have a valid checking account,
- To have a regular income,
Payday loans can be hard to pay back due to high interest rates. This leads to re-borrowing and, subsequently, entering a negative spiral of debt. The Consumer Financial Protection Bureau estimates that at least 1 in 4 payday loans are re-borrowed nine times.
With these loans so readily available, and the long-term negative impact they incur, it is easy to understand why price caps and other legislations are being introduced to protect vulnerable consumers.
Are Consumers Protected in Other Ways too?
Since 2017, regulation has been in place to help protect borrowers, enforced by the Consumer Financial Protection Bureau.
This includes forcing payday lenders to carry out more thorough affordability checks to make sure that the borrower can afford to take on this loan.
There is other regulation in place to protect borrowers, including;
- Lenders cannot loan to consumers who have pre-existing short-term loans;
- Lenders cannot use borrower’s car title as loan collateral;
- Lenders cannot repeatedly attempt to withdraw money from the borrower’s bank account if there is no money;
- Lenders are legally required to disclose the Principal Payoff Option to any borrowers;
- Lenders can only extend loans for borrowers who have already repaid at least one-third of the principal amount.
Can I Have More Than One Payday Loan at a Time?
In some cases, getting two payday loans at once may be possible, but there have been some Consumer Financial Protection Bureau (CFPB) rules that were put in place to protect borrowers and limit the ways people can access payday loans. Not to mention, certain states limit how much you can borrow in payday loans, while others ban them outright.
Some states don’t prevent you from taking out more than one payday loan at a time.
For example, in Virginia, the maximum loan amount is $500. However, this does not mean you can only borrow $500. All this means is that any individual lender can only give you $500 in a single loan payment.
Therefore, the lender is able to and often will allow you to roll over your loan if you can’t pay at the due date. There may be additional fees associated with these. But they can’t increase your initial loan amount to over $500.
So, if you have a $500 loan from one lender, there’s nothing prohibiting a different from giving you another $500 loan. Dime Alley works with multiple lenders, so if you live in Virginia, there’s nothing stopping you from applying for more than one $500 loan with us, as we’ll make sure to connect you to a different lender for your second loan.