Legal Status of Payday Loans

Just because something is advertised and widely used, does not mean that it is accepted everywhere.  Payday loans, like gambling and prostitution, is something that is not entirely legal everywhere you go.  In fact, in some places it is seen as a form of loan-sharking or racketeering due to the often associated high interest rates and fees. 

Are Payday Loans Legal?

The legal status of payday loans varies by state. Many states have taken steps to protect consumers from payday loan abuse through criminal usury statutes, interest rate caps, and required installment payment plans.

The legal status of payday loans is most nebulous in Wisconsin, where such loans are not specifically legal but there is no cap on interest for any lender. Some other state legislators have passed laws deregulating or exempting low-principal loans, effectively removing consumer protections on payday loans.

Other states have taken steps to protect consumers by directly or indirectly prohibiting common payday loan practices. Connecticut, Maryland, Massachusetts, North Carolina, Pennsylvania, Vermont, West Virginia, and the District of Columbia have placed interest rate caps on consumer loans such that payday loan companies with a technically legal status cannot make a profit in those states. The District of Columbia and North Carolina are also taking steps to make lending based on a personal check illegal.

Where are Payday Loans Illegal?

Payday loans are specifically prohibited under Georgia’s racketeering laws. Usury statutes and general interest rate limits prevent payday lending in New York, New Jersey, and Arkansas. Payday lending’s legal status in Arizona will fall into this category in July 2010, when the current law authorizing payday loans sunsets. A ballot initiative to extend the current legal status of payday lending was defeated in November of 2008.

Payday loans have special legal status in Maine, Oregon, New Hampshire, and Ohio, but the laws authorizing them are designed to give consumers some protections. All of these states cap interest rates, though Maine uses a tiered system which allows higher rates on some loans based on the term and principal of loans. Oregon allows an additional 10% fee on the initial loan principal.

In the 35 states in which payday loans are at present guaranteed legal status, loopholes and fine print can confuse consumers when evaluating payday loan products. The best source of information on your state’s payday loan legislation is your state loan regulator.