What is The Regulation on US Payday Loans?

Author · Modified on 5 May, 2022

Payday loans are legal in 37 of the US states, while the remaining states prohibit the loans. In the states where they are legal, there are varying levels of regulation, including how much you are allowed to borrow and how much interest can be applied to loans.

These regulations are in place to protect consumers and prevent them amassing high debts and being landed in financial trouble.


Key Points


  • Payday loans are authorized in 37 of the US states, including Texas and California.
  • They are prohibited in the rest of the states, such as New York and New Jersey.
  • Each state will have different regulations regarding how much money you can borrow, and how much interest is charged (usually around 300% to 600% APR). For instance, interest that can be charged on loans in  Montana is capped at 36%.
  • These regulations are in place to prevent consumers from being exploited. Due to increasing attention on careful treatment of consumers, regulation on loans has increased in recent years.
  • Some states allow you to take out a maximum of one or two payday loans at any time
  • You can check that the lender you are considering opting for is regulated by checking the OLA website or SEC register, or checking their status with the Better Business Bureau.


What is a Payday Loan?


Payday loans are sought as a means of money when faced with short-term and usually unexpected financial hardships. For example, you may be faced with a plumbing or medical bill, or have to fix a car following an accident. These are unforeseen costs which payday loans could help to cover.

Payday loans should not be used as a long-term financial solution, as they come with high interest, and are therefore costly and unsustainable to consistently use.


Why Are Payday Loans Regulated?


Loans are regulated and sometimes even banned within the US. This may seem inconvenient as it can make borrowing less easily accessible. However, you should be aware that regulations are in place for your own benefit.

As appealing as loans may be, they come with high interest and can negatively impact your credit score and land you in further trouble if you fail to pay off your loan as you have agreed. As such, regulations are in place to prevent you falling deep into debt, facing legal action or incurring damage to your credit score.


Which States Are Payday Loans Legal In?


Payday Loans are legal in 37 of the US States, including Alabama, Colorado, California, Maryland, Ohio, Rhode Island, Tennessee, Texas and Utah. Each of these states will have different regulations imposed on payday loans. For example, if you receive a loan in California, the maximum amount you can borrow is $300. If you are in Texas, there is no cap set on how much you can borrow.

Similarly, there are restrictions on how high interest on payday loans can be.

The Consumer Financial Protection Bureau can discipline lenders who violate these rules, making sure that consumers are protected. They have this ability as the power to do so was given to them within Federal Regulation, namely the Dodd-Frank Wall Street Reform and Consumer Protection Act.


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Different states have implemented different regulations on their loans.


What If I Can’t Pay My Loan Back?


If you cannot pay off your payday loan, it can land you in further problems. On top of the money you need to pay back alongside the interest applied to it, you could be faced with additional fees. You could also be threatened with legal actions as lenders have the ability to file a law suit against you.

Some payday lenders will have access to your bank account, if these were the terms of your agreement. If so, they could withdraw the funds directly from your account when they are available.

Importantly, your credit score may suffer if you fail to repay your debts on time. This means that your financial reputation will be damaged and you may have difficulty securing loans or a mortgage in the future.

However, there are collection limits in the US which means that lenders are limited in how much they can charge you for failing to repay your loan promptly.


Can I Get More Than One Loan At Once?


Yes, it is possible to secure more than one loan at once, but different states have different regulation on this. For instance, Washington and Virginia have restrictions on how many loans you are entitled to. These restrictions can also offer lowered interest rates to borrowers really struggling to pay back their loans.

The Consumer Protection Bureau are trying to prevent borrowers taking out multiple loans at once. This is because of the costs associated with payday loans and the financial troubles they can cause.


The Consumer Protection Bureau are trying to limit how many loans can be taken out at once.


Where Can I Learn More?


As payday lenders are subject to state and federal regulations and caps, it is important to be aware of the regulations when considering a payday loan so you know both what you are entitled to, and what will happen if you fail to pay it back.

To find out more about regulations on payday loans you should visit the NCSL website here.

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