If a borrower is unable to access funds or obtain credit through a bank or credit union, payday loans offer an alternative way to acquire short-term cash, though the funds come at a hefty price. The usual arrangement requires the borrower to write a post-dated check, including fees charged by the lender. This serves as security for the loan and can later be deposited or direct-debited from the borrower's bank account. New Jersey law sets limits on interest rates that, in effect, prohibit conventional payday lending in the state.
New Jersey Cap on Usury Rates
By New Jersey law, short-term interest rates are capped at 30 percent. Payday loans, however, charge several times that rate -- in some cases, several hundred percent on an annual basis -- when the usual fees are included as part of the interest rate charged. As a result, the usury laws in New Jersey bar payday lending operations from setting up storefronts or other physical outlets in the state by making them insufficiently profitable for lenders.
Check-Cashing Also Barred
The New Jersey Consumer Fraud Act also bars the usual method of extending payday loans. It is illegal in the Garden State to advance money to a borrower on a check that has been post-dated, or to cash such a check. Consumers who encounter this practice or have complaints about any kind of lending operation in New Jersey should contact the New Jersey Department of Banking and Insurance.
Fines for Violation of Consumer Fraud Act
Violations of the New Jersey Consumer Fraud Act carry a fine of no more than $10,000 for the first violation, and a fine of no more than $20,000 for the second violation. An offender also may be subject to an award of punitive damages, and treble actual damages, as the result of a civil lawsuit and a finding that the defendant violated the law.
Long-Distance Payday Lending
The Internet provides a way for payday lending operations to offer loans to New Jersey residents. An online lender may extend such a loan without verifying the borrower's state of residence, and require repayment by an electronic debit direct from the borrower's bank account. This is also barred by New Jersey law, however, which covers a lender "wherever located," who induces a borrower to a payday loan arrangement by phone, mail, broadcast advertisement or over the Internet.
Enforcement of Payday Loans
Contracts for loans that charge over 30 percent interest, including fees, are illegal and unenforceable in New Jersey. A borrower sued by a payday lender for default on such a loan would have grounds to have the case dismissed. In theory, he also could initiate an action of his own against the lender for violation of the state's usury laws, and against any bank that facilitated an automatic withdrawal for payment of the loan.