Personal Loan Low Interest

Payday Loan Regulations and Usury Laws

Payday loans are short-term loans of relatively lesser amounts that are given to an applicant. It is an unsecured form of loan which is why the interest rates for these loans tend to be on the higher side. The prerequisites for getting approved for payday loans is that the user must be a citizen of USA (or the country where he is applying the loan for), having a checking account and have a regular source of income which guarantees the fact that the payday loan lenders can recover the money.

Law and regulations on payday loans vary not only between different countries but also within the USA and its states. There are some jurisdictions that keep a ceiling on the APR (Annual Percentage Rate) of interest that any lender, including payday lender can levy. This is to prevent usury or the practice of charging excessive rates of interest on the unsuspecting borrower. At the same time, there are some jurisdiction which gives complete freedom to payday lenders to run their financial operations and charges.

As such the payday loan industry in the US is thriving at an admirable rate. However, there is widespread chasm between two schools of thought that has only help fuel the popularity of this industry. There is a lenders lobby that pushes the lending practices while there are consumer protection agencies and industry competitors who lobby to bring down the rates of interest for the benefit of the consumer.

Payday lending is legal and regulated in 37 states while in 13 states it is deemed illegal or not viable. However, they are not banned totally, there are laws that prevent payday loans that come in the purview of usury limits and the interest rate ceilings are based on annual percentage rate or APR.

Here are the states which consider payday lending illegal

Massachusetts (not completely illegal but has strict regulatons)
New Hampshire
New Jersey
New York
North Carolina
West Virginia

Usury laws on Payday loans

Though there are usury laws that prevent higher interest charging as mentioned above, there are some states which circumvent this issue by getting around usury laws by forming ties with nationally chartered banks based in another state that has no usury limits, like for instance, South Dakota. This practice is also known as ‘rent-a-bank’ or ‘rate exportation’. So in this case, the loan is regulated by the laws of the state where the bank is chartered, irrespective of the state where the borrower resides in. This is the same reason why you find credit card issuers in Delaware and South Dakota offering credit cards nationwide because these states have actually done away with usury laws. Though there are laws framed to prohibit such practices, the FDIC (Federal Deposits Insurance Corporation- the organization that underwrites most private bank deposits) permits its member banks to be a part of the payday lending process but it did issue norms in 2005 that discourages long-term debt behavior by putting into effect a longer-term loan after six incidences of payday loan renewals.

Personal Loan Low Interest