There was a time when the payday loan industry ran amok because it was new and unfettered and lenders (both scrupulous and downright dirty) discovered that they could take advantage of customers by charging absolutely outlandish fees, hidden rates, and present lengthy, wordy contracts that none but a lawyer could understand with hidden meanings and clauses hidden in them. The American payday loan industry was a mess.

How are payday loans regulated?

In the United States, payday loans are regulated by state laws. They are treated as small loans in many states and, therefore, are subject to small loan caps that require APR not to exceed 36% on average.

Are payday loans federally regulated?

The federal Truth in Lending Act of 1968 requires various disclosures, including all fees and payment terms. 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.

What is payday loan usage and regulation like in the United States?

Nationally, the average usage rate for payday loans is 5.5 percent, but usage by state varies from 1 percent to 13 percent. Usage rates also vary by law type and are 6.6 percent in Permissive states, 6.3 percent in Hybrid states, and 2.9 percent in Restrictive states

Finally, however, individual states began to get wise regarding the regulation of the personal loan industry and began to lay down guidelines, regulations and laws concerning the cash advance or payday loan. These laws tamed those who offered an American payday loan to any consumer and forced conformity in contracts, processes and fees that could be charged. States across the country continue to refine the process of making sure that none are taken undue advantage of in the payday loan industry, and to date over 30 states have regulations governing these personal loans.

A State's Rights Matter

For the most part, the federal government has left the matter of regulating the American payday loan industry to the states. This means that the guidelines for what you can or cannot be charged will vary from place to place within states boundaries. For Internet lenders, such as those in our network, the laws of the borrower's home state determine the guidelines under which any loan will be offered, (which is why you have to choose your state before being told how much you can borrow).

While the specifics of a payday loan's legal obligations and matters are left up to the individual states, there are some general guidelines that you can expect to find across most of the states that do regulate personal loans:

  • Limits on loan amounts: How much you can borrow is limited primarily by the laws of your state followed by your income level and ability to repay a loan and/or your history with the lender. (Some lenders offer higher loan amounts to returning borrowers - see our Three Great Incentives page for more information).
  • Limits on loan fees: This is the primary target of most states' legislation regarding the American payday loan industry - how much can be charged in fees for a loan. The fee that you see for a payday loan is expressed in a simple dollar amount that is often converted into an annual percentage rate (APR) by those who are interested in knowing how much you would pay on that loan were it extended out for a year. It is on the basis of this yearly rate that limits are set by the states for what fees can be charged.
  • Limits on who can offer loans: Not every person who wants to try to make a buck is eligible to offer payday loans. Most states will have guidelines, restrictions and licensing requirements for payday loan lenders.
  • Limits on loan duration: How long you have to repay a loan is usually, as its name implies, just a pay period, but some American payday loan lenders will give you a greater period of time (up to nine months in some cases) to repay the loan. The limits set on time are also a matter of state's law usually.