Are Payday Loans Legal?
Payday loans are short-term, high-cost loans designed for borrowers with poor credit or a limited credit history. They are typically easy to obtain and can help cover immediate financial emergencies, such as car repairs, medical bills, or other unexpected expenses.
However, their legality depends entirely on your state of residence. The Federal Trade Commission (FTC) helps regulate payday lending at the national level, but state laws determine availability. In some states, payday loans are heavily regulated or outright illegal due to interest rate caps. Other states permit payday lending with more relaxed regulations for lenders.
States Where Payday Loans are Legal
Payday loans are currently legal and available in the following states:
- Alabama
- Alaska
- California
- Delaware
- Florida
- Idaho
- Indiana
- Iowa
- Kansas
- Kentucky
- Louisiana
- Michigan
- Mississippi
- Missouri
- Nevada
- North Dakota
- Ohio
- Oklahoma
- Oregon
- Rhode Island
- South Carolina
- Tennessee
- Texas
- Utah
- Washington
- Wisconsin
- Wyoming
States Where Payday Loans are Prohibited or Restricted
The following states and U.S. territories have either made payday lending illegal or have enacted interest rate caps (such as 36%) that effectively prohibit traditional payday loans:
- Arizona
- Arkansas
- Colorado
- Connecticut
- District of Columbia
- Georgia
- Guam
- Hawaii
- Illinois
- Maine
- Maryland
- Massachusetts
- Minnesota
- Montana
- Nebraska
- New Hampshire
- New Jersey
- New Mexico
- New York
- North Carolina
- Pennsylvania
- Puerto Rico
- South Dakota
- Vermont
- Virgin Islands
- Virginia
- West Virginia
Payday Loan Regulations
In states where payday loans are legal, lenders must comply with specific federal and state statutes. Depending on the jurisdiction, these short-term loans may be restricted in the following ways:
- Maximum finance charges: Lenders typically charge a fee for originating the loan. This is calculated based on the dollar amount borrowed or a percentage of the total. Many states allow lenders to charge between $10 and $30 per $100 borrowed.
- Maximum loan amount: Loans are usually capped at approximately $500, though some states permit higher or lower limits.
- Concurrent loans: In certain states, borrowers are restricted to taking out only one payday loan at a time to prevent debt cycles.
- Repayment terms: A standard payday loan has a repayment term of 2 to 4 weeks. However, local laws vary. For example, Wisconsin permits terms up to 90 days, while Rhode Island requires a minimum term of 13 days.
Please note that payday lending laws change frequently. It is advisable to check with your state attorney general or financial regulator for the most current regulations. Always ensure any lender you consider is properly licensed to operate in your state.
The Military Lending Act and Payday Loans
Active duty service members and their dependents receive additional protections under the Military Lending Act (MLA). This Act regulates payday loans, title loans, cash advances, and other financial products regardless of state law. Most notably, lenders cannot charge military borrowers more than 36% MAPR (Military Annual Percentage Rate), which includes fees and interest.
Tribal Lenders and Payday Loans
Tribal payday loans operate similarly to standard payday loans, but the lenders are typically owned and operated by Native American tribes on sovereign land.
Because of this sovereign status, these lenders often claim immunity from state usury laws and regulations. Consequently, they may offer larger loan amounts or different repayment terms than state-licensed lenders.
However, tribal lenders are generally still expected to adhere to federal lending laws. When in doubt, contact your state attorney general’s office or review the lender’s Better Business Bureau (BBB) profile to verify their legitimacy.
