States concerned about payday lending within their borders have passed a variety of laws to regulate it. The following list details the most widely-used regulatory strategies.
A very common form of payday lending regulation is price caps. States that “prohibit” payday lending usually do so by setting APR caps that are too low for the payday business model to profitably operate, effectively driving lenders from the state. Caps of 36% APR are used by many states for this purpose. States with caps high enough to allow payday lending also may use APR limits, but more commonly the caps are stated as a dollar limit per amount lent. A cap of $15 per $100 is typical. Some states use tiered schedules of price caps: for instance, Indiana limits fees to 15% of the first $250 lent, 13% of the next $251-$400, and 10% of anything above that.
2 . 2 . 2 Size caps
Many states limit the maximum size of a payday loan. The modal size limit is $500. Some states don’t use a fixed size limit but instead set the limit as a percentage of the borrower’s monthly income. Size limits are meant to limit a borrower’s ability to become indebted, though they can potentially be circumvented in states that allow borrowers to take multiple loans at a time.
2 . 2 . 3 Loan term limits
Maximum term limits put an upper cap on the length of a payday loan. Minimum term limits potentially directly address one of the alleged problems with payday loans: short maturity that leaves borrowers scrambling to repay by the due date. By requiring longer minimum terms, states might give customers the time necessary to sort out their finances before the loan is due. However, if the main source of repayment difficulty is that the loan doesn’t amortize, a slightly longer balloon loan may be no AK installment loans easier to retire than a slightly shorter one. Some states don’t use a fixed minimum loan term, but instead vary the minimum according to the length of the borrower’s pay period.
Some states set limits on the absolute number of loans a customer can borrow at a given time, while others set limits on the number of loans a customer can borrow from a single lender at a given time. The former type of regulation requires that there be some way for the lender to check the activity of other lenders; the latter type does not. For this reason, limits on the absolute number of simultaneous loans are often enacted along with legislation establishing a statewide loan database.
2 . 2 . 5 Rollover prohibitions
Prohibitions on renewing (“rolling over”) loans are extremely popular, though their efficacy is debated. Superficially, rollover bans seem like a good tool to address the problem of repeat borrowing. In practice, these laws may at times be circumvented by paying off the first loan and then immediately taking out a second loan, which is technically not the same loan as the first. States vary according to how a rollover is defined and in the number of rollovers, if any, that they permit. Some states permit rollovers only if a portion of the principal is paid down.
2 . 2 . 6 Cooling-off periods
After a period of repeat borrowing some states require a “cooling-off” period, which is a length of time during which borrowing is not allowed. Cooling-off periods vary in length, though 1 to 10 days is common, and may be triggered according to the number of consecutive loans or by the total number of loans in the year. Like rollover prohibitions, cooling-off periods are an attempt to directly prohibit repeat borrowing.