A payday loan is a term used for a small short-term unsecured loan issued by microfinance organizations. Such loans are also sometimes referred to as “cash advances,” although the term can also refer to funds provided through a pre-established line of credit, such as a credit card. The issuance of advance loans depends on the data on the previous salaries of the consumer and his or her employment. Payday loan legislation varies greatly between countries, as well as their regions, different states or provinces.
To prevent usury (unreasonable and excessive interest rates), some jurisdictions limit the annual interest rate that any lender, including payday loan providers, can charge. Some jurisdictions prohibit payday lending entirely, and some have very few restrictions on it.
Payday loans are associated with a higher percentage of loan defaults.
The main process of lending involves the provision of a short-term unsecured loan by the lender, which must be repaid on the next borrower’s payday. Typically, some sort of employment or income verification is required (using bank statements), although some payday loan organizations do not verify income or creditworthiness.
In the traditional retail model, borrowers visit a payday loan organization and receive a small cash loan with the obligation to pay in full when the borrower receives their next paycheck. The borrower writes a retroactively dated check to the lender for the total loan amount plus interest. If the account does not have sufficient funds to cover the check, the borrower may have to pay a fee for not covering the check from their bank in addition to the loan costs, and the loan may incur additional interest or an increased interest rate (or both) as a result of non-payment.
In the United States, rates on such loans in most states are limited by the Uniform Small Loan Laws (USLL). The norm is rates of 36-40% per annum.
Payday loans are legal in the following states: Alabama, Alaska, California, Delaware, Florida, Hawaii, Idaho, Illinois, Indiana, Iowa, Kansas, Kentucky, Louisiana, Michigan, Minnesota, Mississippi, Missouri, Nebraska, Nevada, North Dakota, Ohio, Oklahoma, Rhode Island, South Carolina, Tennessee, Texas, Utah, Virginia, Washington, Wisconsin, and Wyoming. The remaining states and the District of Columbia prohibit this practice. The Annual Percentage Rate (APR) is also capped in some jurisdictions to prevent excessive usury. Some states have laws that limit the number of loans a borrower can take at one time.
As far as federal law is concerned, the Consumer Protection Act gives the Financial Consumer Protection Bureau (CFPB) special powers to regulate all creditors.