Payday loans are heavily regulated in the United States, with some states completely banning them and others having strict restrictions on interest rates. Arizona, Arkansas, Connecticut, Georgia, Maryland, Massachusetts, New Jersey, New York, North Carolina, Pennsylvania, Vermont, West Virginia and the District of Columbia all prohibit payday loans. Georgia bans them under extortion laws, while New York and New Jersey ban them through criminal usury statutes that limit loans to 25 percent and 30 percent annual interest respectively. Arkansas has a state constitution that limits loan rates to 17 percent annual interest.
To avoid usury (excessive and unreasonable interest rates), some jurisdictions limit the annual percentage rate (APR) that any lender, including payday lenders, can charge. Some jurisdictions prohibit payday loans altogether, and some have very few restrictions on payday lenders. In the United States, rates on these loans were previously restricted in most states by the Uniform Small Loan Laws (USLL), with an APR of 360% to 400% generally the norm. Payday lenders tend to consider your ability to repay the loan rather than your credit score. Payday loans have an excellent interest rate and it's easy to get approved.
However, it's riskier compared to traditional lenders. Iowa is one of the states that heavily regulates payday loans. If you're considering taking out a payday loan in Iowa, it's best to check with the competent authority if you're receiving a legal interest rate. State laws governing payday loans vary. Eight states in Connecticut, Maryland, Massachusetts, New Jersey, New York, Pennsylvania, Vermont and West Virginia have no specific statutory provisions on payday loans or require payday lenders to meet their general loan interest rate limits.
Thirty-eight states including Louisiana have laws that specifically allow payday loans. Four of those states - Colorado, Montana, Ohio and New Hampshire - allow lending but with strict restrictions on interest rates. The Consumer Financial Protection Bureau issued a final rule on payday loans in 2020 that rescinded Obama-era provisions that would have required lenders to ensure that borrowers could repay their loans before issuing cash advances. Payday lenders have made effective use of the sovereign status of Native American reserves to offer loans over the Internet that evade state law. In the early 1990s check collectors began offering payday loans in states that were unregulated or had lax regulations. In recent months several states have taken steps to limit interest rates on payday loans in an effort to protect consumers from getting into their heads with these traditionally high-cost loans.
Annual interest rates for payday loans range from 129 percent in Colorado - which has some of the most stringent payday loan interest restrictions in the country - to 582 percent in Idaho which has no restrictions. The Pew report found that 69 percent of people who applied for the loans used the money to cover recurring expenses such as utilities while only 16 percent used the payday loan to deal with an unexpected bill such as a car repair or emergency medical expense. The law also requires disclosure of industry information in the state where payday loans have an average annual interest rate of 474 percent - one of the highest in the nation. While payday loans are not legal in North Carolina there are several options for accessing short-term emergency loans. Although borrowers typically have payday loan debt for much longer than the announced two-week period of the loan with an average of approximately 200 days of debt most borrowers have an accurate idea of when they will have repaid their loans. Payday industry representatives say those rates are misleading as loans are designed to be repaid quickly. An investigation conducted by the Consumer Financial Protection Bureau during the Obama administration found that nearly 1 in 4 payday loans are borrowed nine times or more.
Illegal states that currently completely ban payday loans include Vermont New Jersey Arizona Connecticut Georgia Arkansas Maryland New Jersey New York Massachusetts and North Carolina Columbia. NCSL cannot provide guidance to citizens or businesses regarding payday lending laws and practices.
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