A payday loan is a small cash loan that’s fully payable on the borrower’s payday. These loans are meant to help the borrower make ends meet between paychecks. However, the high interest rates associated with them can trap borrowers in an endless cycle of debt. Payday loans with triple-digit interest rates are illegal in Maryland, making them difficult to find within the state.
Federal Truth and Lending Act Applies
Under the Federal Truth and Lending Act, payday loans are treated like any other type of credit. Therefore, the lender must disclose the finance charge, cost of the loan and the annual interest rate. The terms of a loan must be in writing, and the borrower and lender must sign the loan agreement. Lenders in Maryland also must get a license from the Commissioner of Financial Regulation. Furthermore, state lending statutes restrict the interest rate lenders can charge, depending on the amount of money borrowed.
Allowable Interest Rates
Maryland caps loans at 33 percent if the amount borrowed is less than $2,000, and at 24 percent for loan amounts less than $6,000.
Loans of $2,000 or less
- Outstanding balance up to $1,000 - 2.75 percent per month
- Outstanding balance between $1,000 and $2,000 - 2 percent per month
- Maximum annual percentage rate – 33 percent
Loans between $2,001 and $6,000
- Outstanding balance greater than $2,000 - 2 percent per month
- Maximum annual percentage rate – 24 percent
Loans of $6,000 or less with interest rates greater than the capped interest rate or finance charge are illegal. If a clerical error results in an excessive interest rate or finance charge, the lender must fix the error before collecting payments. Otherwise, the loan is illegal.
Fighting Tricky Lenders
Capped interest rates coupled with a high risk of default makes payday loans less lucrative for lenders. As a result, some lenders skirt Maryland rules by using banks domiciled outside of the state and offer the loans online.
Maryland, however, is one of the most aggressive fighters against payday lending. For example, state regulators combat this tactic by reporting the banks that payday lenders use to the federal government. Federal law makes it mandatory that banks track the activities of payment processors. This means banks are accountable for fraudulent payday lending activities in the state.