How are Payday Loans Regulated?
Payday loans are very dangerous because people tend to get stuck in a cycle of having to take out a whole series of loans. Given this danger and the exploitative nature of payday loans you would think that there would be strict regulations about how they operate. In truth the regulations vary dramatically from one place to another. The bottom line is that you really shouldn’t expect any kind of regulation to protect you from these companies.
In almost all cases payday loan companies are regulated by the state government. The result is that the rules can vary dramatically. There are some states that don’t allow payday loan companies to operate at all and others that allow them to operate with almost no regulation at all. The two extremes are both problems, there is clearly a need for payday loan companies so banning them altogether is not really a good idea. On the other hand most of these companies are exploiting borrowers so there needs to be some sort of regulation.
In most cases the rules that do apply are in regards to the interest rates. There is usually a cap on the amount of interest that they can charge. Usually this isn’t limited to just the payday loan companies; it usually applies to all lenders. While this is helpful to borrowers most payday loan companies have found a way around this. Most of the cost of a payday loan is in the form of fees, usually a fee for cashing the check that you have to leave them. This amount is usually not regulated so they can charge whatever they like for this service.
The other area that is usually regulated is the amount that you can borrow. In most cases you will be limited to borrowing no more than half of your net pay on your next check. This is to ensure that you aren’t borrowing more than you can possibly pay back. Again the protection that this provides is very limited. What usually ends up happening is that you keep rolling over your loans. You just end up taking one loan after another since losing half of your next paycheck makes it almost inevitable that you will have to borrow more money.
One area where a lot of states are starting to apply more regulation is in requiring payday loan companies to be more forthcoming about the total cost of the loan. In the past the ads would talk about the interest and then include a little note about fees without ever explaining what these are. The result was that most people had no idea how much a payday loan was costing them. Many states now require that the payday loan companies clearly display the total amount that the loan will cost in their ads. This makes it more obvious just how much these loans cost.