Legal Status of Payday Lending by State

Payday loans are small loans subject to state regulation. Traditionally states have capped small loan rates at 24 to 48 percent annual interest and required installment repayment schedules. Many states have criminal usury laws to protect consumers. (See 50-State Scorecard.)

Payday loans are legal in states where legislatures either deregulated small loans or exempted these lenders from small loan or usury laws and enacted legislation to authorize loans based on holding the borrower's check.

Seventeen States and the District of Columbia Prohibit Extremely High Cost Payday Lending

States combat high cost credit through several legal strategies. In Georgia, payday lending is explicitly prohibited and a violation of racketeering laws. New York and New Jersey prohibit payday lending through their criminal usury statutes, limiting loans to 25 percent and 30 percent annual interest, respectively. The Arkansas Supreme Court ruled in 2008 that the state Check Cashers Act, which purported to authorize high-cost payday lending, violated the state's constitutional usury cap. Almost all payday lending halted in Arkansas due to enforcement by the Attorney General and private litigation.  In 2010 voters adopted a 17% annual rate cap for consumer credit under the state constitution.  In 2011 the Arkansas legislature repealed the Check Cashers Act that had authorized payday lending.

Payday lending is not specifically authorized and is defacto prohibited by several state small loan rate caps. These states include Arizona, Connecticut, Maryland, Massachusetts, North Carolina, Pennsylvania, Vermont, West Virginia, and the District of Columbia. Of those jurisdictions, the District of Columbia, Arizona, and North Carolina repealed or sunset their payday loan authorization laws.

Five states permit loans based on checks held for deposit but at a much lower rate than typical payday lending. The Maine Uniform Consumer Credit Code caps interest at 30 percent for small loan companies but permits tiered fees that result in 261 percent APR for a two-week $250 loan. Oregon permits a one-month minimum term payday loan at 36 percent interest plus a $10 per $100 borrowed initial loan fee. As a result a $250 one-month loan costs 154 percent APR for the initial loan, and 36 percent APR for any subsequent loans. New Hampshire capped payday loan rates at 36 percent APR, effective in 2009. The lowest-cost payday loan law was enacted by Ohio in 2008, capping rates at 28 percent APR. Ohio voters in late 2008 soundly rejected an industry ballot initiative to restore 390 percent annual rates. Montana voters overwhelmingly passed a ballot initiative in 2010 to cap small loan rates at 36% APR, effective in 2011.

Thirty-Three States Authorize High-Cost Payday Lending

Thirty-three states enacted safe harbor legislation for payday lenders and permit loans based on checks written on consumers' bank accounts at triple digit interest rates or with no rate cap at all.

Colorado amended its payday loan law in 2010 to set a minimum six-month term for loans based on unfunded checks held by the lender. The cost elements of a payday loan in Colorado include 45 percent per annum interest, a finance charge of 20% for the first $300 borrowed plus 7.5% of $301 to $500, plus a $7.50 per $100, up to $30, monthly maintenance fee after the first month. Loans can be prepaid at any time or repaid in installments or one lump sum. The APR example in the chart below is for a $250 loan repaid in one lump sum after six months.

The chart below lists the maximum fee cap, if any, in these thirty-three states and the annual percentage rate (APR) for a two-week $250 loan based on the legal maximum. In some states, fees are a percentage of the amount of the loan. In other states, caps are based on the total check, including the fee. Frequently used devices to avoid the state rate cap are noted as "loopholes."