Are Payday Loans Legal in the US? A Comprehensive Guide

Payday loans are legal in 27 US states with restrictions in 9 more. Learn about regulations & restrictions on payday loans & how to protect yourself from predatory lenders.

Are Payday Loans Legal in the US? A Comprehensive Guide

Payday loans are legal in 27 states, with another 9 allowing some form of short-term loan with restrictions. The remaining 14 states and the District of Columbia have completely prohibited the practice. Payday loans are small loans subject to state regulation, with traditionally limited annual interest rates of 24 to 48 percent and installment schedules. Many states also have criminal usury laws in place to protect consumers.

In the US, payday loans are regulated by state laws. An investigation conducted by the Consumer Financial Protection Bureau during the Obama administration found that nearly 1 in 4 payday loans are borrowed nine times or more. In states that allow payday loans, the cost of the loan, fees, and maximum loan amount are capped. The minimum loan duration is 91 days and the maximum loan duration is one year. Opponents of the Obama-era payday loan rule argue that the provisions on capacity to pay were too onerous and costly.

Payday lenders operate stores in 32 states, with only Oklahoma and four other states having passed comprehensive reforms to switch from high-risk, single-payment loans to those that use an installment structure. In states that have enacted comprehensive payday loan reforms, installment loans are safer and more affordable, but elsewhere, payday installment loans often have excessive prices, long terms, and unaffordable payments. Damages, costs and disbursements to which the licensee may be entitled by law in connection with any civil action to collect a loan after default are subject to division (B) (of this section), but the total amount of damages and costs shall not exceed the amount of the loan originally contracted. In states that still have small loan rate limits or usury laws, the state page mentions the law limiting rates and the rate limit on small loans. Illegal states that currently completely ban payday loans include Vermont, New Jersey, Arizona, Connecticut, Georgia, Arkansas, Maryland, New Jersey, New York, Massachusetts, and North Carolina, Columbia. This page summarizes state statutes regarding payday loans or deferred filing which include short-term, one-time payment loans based on personal checks held for future deposits or electronic access to personal checking accounts. If a payday loan is paid in full at any time during a month, no monthly maintenance fee will be charged for that month.

There are still predatory lenders working around legislation to offer illegal and unlicensed payday loans. Lenders generally charge borrowers higher rates on single payday loans than installment loans even when both are allowed by state law. Borrowers are protected from expensive payday loans by reasonable limits on low loan rates or other prohibitions in fifteen states. In the 32 states that allow payday loans, borrowers can generally apply for one of these loans by going to a lender and providing only valid identification, proof of income, and a bank account.