Payday Loan Regulations

A payday loan is a short-term loan, based on a borrower's check or future deposit, such as a direct deposit from an employer. Payday loans range from $100 to about $1,000 and last for only about two weeks. The payday lender will charge a high rate of interest. Payday loans are legal in 35 states, though many states have imposed restrictions aimed at protecting the those who must resort to that type of loan. Read on to learn what is required by both the borrower and the company making payday loans.

Requirements To Borrow

A person will qualify for a payday loan if he can show that he has an operating checking account, a source of income from employment and he can show acceptable identification to the lender. Unlike normal personal loans, where the lender will do a thorough credit check of the applicant, that requirement does not apply with payday loans. In fact, the lender doesn't care if the borrower is in a financial position to pay back the loan.

Finance Charges

At first, payday lenders charged customers a usurious level of interest because borrowers had no other sources of quick funds. Some states viewed those interest rates excessive and passed laws restricting them. For example, Indiana passed a law that restricted what a payday lender can charge. A payday loan of $100 may not have a finance charge of over $15 for a two week period. For amounts over $100, the lender is limited to 10 percent of the outstanding balance. There are 14 other states, plus the District of Columbia, that have passed similar legislation. In general, you can expect to pay between 15 and 25 percent interest on payday loans for two weeks.

Renewals

There are several states that prevent lenders from automatically renewing a payday loan. Those laws have led to widespread abuse like simply rewriting the existing loan as new, rather than a renewal. That led three states to outlaw payday loans, entirely. Most states, however, will allow lenders to renew payday loans if the borrowers can demonstrate the ability and willingness to pay off the loan in due course.

Military Regulations

In 2007, the federal government imposed strict regulations for payday loans that were made to the military. Specifically, the regulations imposed a ceiling of 36 percent per year on all military payday loans, and made it unnecessary for borrowers to given the lender a post-dated check for the loan or to authorize the lender's access to the borrower's checking account.

Future

By the end of 2008, the payday loan industry estimated that about $35 billion in loans had been made at about 25,000 locations, with about 20 percent of that business being done online. The industry has enjoyed a growth rate in excess of the national average, not withstanding the restrictions that states have imposed on it. In the future, you can expect that growth to continue but there will be additional restrictions placed on both borrowers and lenders.