Payday loans are far from an optimal lending option. With a history of sky-high rates and predatory lending tactics, they send many consumers into a debt spiral they can't escape. To protect consumers, California imposes restrictions on how much payday lenders can lend, caps their loan rates and restricts future loans and fees.
How Payday Loans Work
Payday loans are short-term loans with high fees designed to hold over consumers until they receive their next paycheck. With a payday loan, the lender generally gives you cash in exchange for a check that it promises not to cash until your next payday. The amount of cash you receive is reduced by the amount of the payday loan fee. For example, you may write the lender a check for $200 postdated for two weeks, and receive $170 in cash. While $30 may not seem like an exorbitant amount of money, the equivalent annual percentage rate for that fee is actually 460 percent.
Protections While Obtaining the Loan
In California, the maximum payday loan amount is $300, and the maximum loan fee is 15 percent of the face of the loan. That means that the most you can be charged for a payday loan in California is $45. California also requires that payday lenders post their license and fee schedule at all retail locations. When the payday lender gives you the paperwork and contract for the loan, it must be written in the language you used to negotiate the agreement. For example, if you spoke to a lender in Spanish about getting a loan, all loan documents must be in Spanish.
Protections While Paying Back the Loan
California laws also protect consumers if things go south with a payday loan. Payday lenders aren't allowed to make you a new loan while an existing loan is outstanding. That means that if you can't pay the loan when you originally agreed, the lender can't issue you a new loan to cover the existing one. A lender can charge you a bounced check fee, but only once -- and it's capped at $15. If you simply can't pay back the loan, the lender is not allowed to threaten you with criminal prosecution.
Protection for Military Servicemembers
Federal law offers additional protections for military service members obtaining payday loans. Along with restricting access to bank accounts, the law prohibits payday loan providers from charging a payday loan rate that exceeds an annual percentage rate of 36 percent. That means that, even if a military service member in California took out the maximum $300 loan, the payday lender could only charge a few dollars in interest for a two week loan. As a result of this restriction, many payday lenders simply don't lend to military personnel.