1. Federal Regulation

Payday lending is legal in 27 states, with 9 others allowing some form of short term lending with various restrictions. 14 states and the District of Columbia forbid payday loans.

As for federal regulation, the Dodd-Frank Wall Street Reform and Consumer Protection Act gave the Consumer Financial Protection Bureau (CFPB) specific authority to regulate all payday lenders, regardless of size. The CFPB has issued several enforcement actions against payday lenders for reasons such as violating the prohibition on lending to military members as well as aggressive collection tactics. The CFPB also operates a website to answer questions about payday lending.

Payday lenders have made effective use of the sovereign status of Native American reservations, often forming partnerships with members of an Indian tribe to offer loans over the internet, which circumvent state laws. The Federal Trade Commission (FTC) is aggressively monitoring these lenders. Most tribal lenders are operated by Native Americans, but there has appeared to be some “rent-a-tribe" schemes, where a non-Native company sets up operations on tribal land.

Many states have laws limiting the number of loans a borrower can have at one time. Most states require all lenders to be licensed in each state and to have real-time verification of loan eligibility for each customer. Some states also cap the number of loans per borrower per year. Other states require that after a certain number of loans, the lender must offer a lower interest loan with a longer-term. Most states have laws that limit borrowers from getting loans from different lenders to try to get around regulations. from more than one lender if there is not an enforcement mechanism in place by the state. The development of new lending services from lenders, often called installment loans, have allowed some borrowers (limited to better credit history) to obtain loans with longer terms and lower interest rates.

2. History of Payday Loans

19th century salary lenders

In the early 1900s, some lenders participated in salary purchases. Salary purchases are when lenders buy a worker’s next salary (for less than the salary amount) before the salary is actually paid. These salary purchases were early "payday loans" structured to avoid state laws.

20th century check cashing

As early as the 1930s, check cashers cashed post-dated checks for a daily fee until the check was processed at a later date. Many payday lenders of this time listed themselves in yellow pages as "Check Cashers." More common in this time period were pawnbrokers. Consumers would provide a valuable item (such as jewelry) in exchange for the money that they needed.

Much like modern-day payday loans, the loans provided by pawnbrokers were often given over short terms. They were also for small amounts of money. Borrowers had to pay back their original loan plus interest before the due date of their loan. If the pawnbroker did not receive their repayment when due, they would sell the borrower’s valuable to get their money back.

The 1990s to present

Banking deregulation in the late 1980s caused small community banks to go out of business. This created a void in the supply of short-term small loans. Banks do not offer these loans as they are not profitable for them. The payday loan industry sprang up in order to fill this void and to supply small loans to workers at expensive rates.

In 1993, Check into Cash was founded by businessman Allan Jones in Tennessee. This business model was made possible after he donated to legislator’s campaigns in several states.

In the ensuing years, the industry grew from less than 500 stores to more than 20,000 and lending more than 40 billion dollars. By 2008, payday loan stores outnumbered Starbucks and McDonald's locations. Deregulation allowed some lenders to restructure their loans to avoid these caps after federal laws changed.

State and federal regulation on growth

The Consumer Financial Protection Bureau, in a June 2016 report on payday lending, found that loan volume decreased 13% in Texas after disclosure reforms. The reforms required disclosures by lenders of "information on how the cost of the loan is impacted by whether it is renewed, typical repayment terms, and other forms of loans that a consumer may consider. The Consumer Financial Protection Bureau has proposed rules in June 2016, which would require payday lenders to verify the financial situation of their customers, provide borrowers with disclosure statements before a transaction, and limit or disallow debt rollovers. This action resulted in the industry declining by 55 percent.

3. Payday Loan Legality & Rollover Regulations by State

The financial crisis ending in 2010 led to calls for changes in the financial regulatory system. In June 2009, legislation was proposed to overall and reform financial regulations. Key points included:

• The consolidation of regulatory agencies, elimination of the national thrift charter, and a new oversight council to evaluate risks
• Comprehensive regulation of financial markets, including increased transparency of derivatives
• Consumer protection reforms including a new consumer protection agency and standards and stronger investor protection
• Tools for financial crises, including a system complementing the Federal Deposit Insurance Corporation (FDIC) authority for an orderly winding down of bankrupt financial companies
• Various measures aimed at increasing international standards and cooperation including proposals related to improved accounting and tightened regulation of credit rating agencies

Legislative response and passage

The House of Representatives passed the initial bill in late 2009, after which the Volcker Rule was introduced. The rule, which prohibits depository banks from proprietary trading, was passed only in the Senate, so the rule was enacted in a weaker form.

The Consumer Financial Protection Bureau (CFPB) was created as part of the legislation that was passed and is responsible for consumer protection in the financial sector. CFPB's jurisdiction includes banks, credit unions, securities firms, payday lenders, mortgage-servicing operations, foreclosure relief services, debt collectors, and other financial companies in the United States.

4. Types of Payday Loans and How Do They Work

There are 2 types of payday loans: online lenders and storefront lenders

At a storefront lender, you interact directly with a lender. You can ask any questions and go over a loan’s terms and conditions in detail. One benefit is that some lenders may be able to give you your cash loan the day you apply. A key factor to consider before applying online is whether the company you are borrowing from is a direct lender or a broker. With a direct lender, you apply to and receive funding from one company directly, with the ability to speak to a representative if you have questions.

Online loans can quickly get the cash you need. But you will not have the storefront 1-on-1 for any inquiries. But you can still discuss your loan with your lender and ask any questions over the phone and make sure the lender explains your responsibilities, loan due date, costs, and so on.

If you work with an online lending broker, you complete an application with that company that then matches your information with lenders willing to extend you a loan that meets your request. Lending brokers increase your odds of loan approval, but they are not lenders. You are referred to a lender who you deal with directly.

No matter if you apply with an online lender or broker, make sure if you are connected with a lender that they are licensed to do business in your state. Laws regarding payday lending vary from state to state and 14 states do not allow payday loans.

5. Basic Requirements for Requesting Payday Loans

You should meet the following basic requirements when applying for a payday loan:

• be at least 18 years old and a U.S. citizen or legal resident
• be employed in your current job for at least 90 days
• net income (after taxes) should be at least $1,000 per month
• have a checking or savings account at a bank or credit union
• have a current telephone number (cell is fine) and valid email address

You may be asked to produce documents (or information from them) to include:

• a recent paycheck stub or record
• a recent bank statement
• a Voided personal check
• current utility bill with your name and address
• a valid driver’s license or identification card
• a valid social security card

Your social security number is mandatory when requesting a payday loan online. Other information, as suggested above, will vary depending on the state you live in.

Please note: Payday loans are illegal for all active military personnel.

7. Payday Loan Repayment Plans

There are a number of payment options that can be considered to repay a payday loan. Regulations vary by state, so be sure to check your state’s website for guidelines that apply to you. You can also ask your lender when reviewing your loan documents for options you may consider.

Many storefront lenders only accept loan payments in person during normal business hours. Others allow for payments online. Most payday lenders use an automated service (ACH) to electronically process your loan payment on the due date.

Depending on your state regulations, there may be as many as 3 repayment methods available to you. They are: pay in full, make a partial payment, or request an extension.

8. Reasons Consumers Consider Getting a Payday Loan

Bad credit and little or no savings often go hand-in-hand. This results in cash shortages whenever an emergency happens, or there are unexpected expenses. Payday lenders fill the gap for many consumers who cannot access other traditional forms of credit.

Millions of people have poor credit, little or no savings, and when their car breaks down, they are unable to fix it if it is more than a couple of hundred dollars. They need their car to get to their work, so they turn to payday lenders.

At least 12 million Americans take out payday loans each year, spending around $9 billion on loan fees. A bad credit payday loan is usually used because of a lack of savings and poor credit ratings. Being short of cash to pay an urgent expense is the number one reason consumers cite for seeking a payday loan.

9. What Are the Advantages and Disadvantages of Payday Loans

Let us start with the PROs or advantages of payday loans:

• They are easy to access: The number one advantage of payday loans is they are easy to apply for and get approval. Many are online and available 24 hours a day, 7 days a week. Unlike traditional loans, which can take a lot of time to apply and wait for approval, payday loan applications can take five minutes or less.
• There are few requirements compared to other loans: Traditional lenders usually require a credit check and may contact your employer to verify if you can repay a loan, and can take weeks or months to process your application. Unlike traditional personal loans, most payday lenders have far fewer requirements to apply.
• Lenders do not check your credit: Unlike traditional loans, where you need good credit to be approved, payday loans do not require credit history. Lenders do not check your credit (no hard credit inquiry), which can lower your credit score. In most cases, payday loans will not help your credit score even when paid on time.
• It is an unsecured loan: Unlike an auto title loan, an auto lease, ora mortgage, payday loans are not secured by personal property. This means that if you are unable to pay back the loan, the lender cannot seize any property. Payday lenders can take other measures like sending your debt to a collections agency or taking you to court to recover any outstanding balance if you default.

CONs or disadvantages of payday loans:

• They are expensive: Depending on the state, payday loans have high-interest rates that average from 300% to 400%. For comparison, many personal loans charge between 12%-36% interest, and credit card interest ranges are about the same.
• Payday loans are considered predatory: A predatory loan is defined as having unfair or unaffordable terms and has the potential to trap consumers in a cycle of debt. Payday loans are viewed as a type of predatory loan because of their high costs that can escalate quickly.

Some examples:

The lender does not check if you will be able to repay the loan. If you cannot repay the loan, you could be forced to extend the loan and accumulate new fees. The loan does not help you build credit. If the payday lender does not report to any of the three major credit bureaus, then it will not help you rebuild your credit scores.

• Each time you extend (called a rollover) your loan, a payday lender charges additional fees, increasing your costs for borrowing the money.
• They target low-income, minority communities

According to a 2016 report, payday lenders are mostly located in minority communities. The report found that there are about 8 payday loan stores per 100,000 people in African American and Latino communities. Mostly white neighborhoods had about half the number of loan stores per 100,000 people.

10. Summary

In summary, we have defined payday loans and provided a history of how they came about up to the current time.

We reviewed the types of payday loans and how they work and also included a table for all 50 states for quick data checks. We covered the basic requirements for getting a payday loan, as well as the costs and fees associated with most of these loans. We also went over repayment terms and options. All of these areas vary depending on the state you reside in, so be sure to check your state’s website for more information.

In addition, there were detailed summaries of the PROs and CONs of payday loans for consideration.

11. Some Commonly Asked Questions about Payday Loans

Sources:

• Payday Loan in the United States
• Dodd–Frank Wall Street Reform and Consumer Protection Act
• Consumer Financial Protection Bureau
• Payday Lending - Federal Trade Commission
• Payday Loan Costs and Fees
• Credit Reports and Scores
• Legal Status of Payday Loan by State