Monthly Archives: August 2012

Do States Regulate Payday Loan Lenders Who Operate Online?

The current economic situation has caused more people in the US to seek out alternative sources of loans, and as a response to this need, several companies have begun to offer payday loans online. Cash-strapped Americans availing of online payday loans come from all the fifty states, and the same can be said of the companies which provide these much needed loans. A few of them may even be located outside the US. The differences in the locations of the borrowers and of the loan providers have contributed to a general confusion as to which state statutes apply. Each state has its own laws regarding online loans and loans in general, but there is no certainty as to which laws apply when borrowers and lenders are located in different areas.

Variance in State Law Limits

Each state has different laws as to the minimum and maximum term duration of an online payday loan. Texas and Kansas, for example, allow an online loan to last from a week up to a month. On the other hand, Under Ohio regulations the term of the online loan may last up to six months.

Each state may also have a different cap amount as to the size of the loan legally allowed. In Montana, a borrower may only borrow an amount ranging from $50 up to a maximum of $300. In Oregon, the cap is set at 25% of the borrower’s net monthly income. Other states such as Maine, New York, and Vermont place no limits at all as to the amount that someone in need can borrow online.

The interest rate charged on payday loans may also be regulated by state statutes. California and Arizona set the interest rate at 15% of the loan at the most. Other states such as New Mexico and Idaho sets no legal limits at all, and if the borrower agrees to pay a certain interest rate then that rate is entirely legal.

Possible Solutions

Though the confusion regarding the proper application of state statutes still exists, there are possible solutions on the horizon. Politicians from both major political parties are currently investigating the benefits of transferring the oversight of the online lending industry from the states to the U.S. Office of the Comptroller of the Currency. This can then minimize the confusion and create much needed clarification and consistency.

The Necessity of Improving the Legal Situation

The need for clarification in the industry has become more evident as the use of online payday laws has become more prevalent. In 2010, more than a third of the $32 billion in small loans came from online means. Experts estimate that this share will double by 2016.

In conclusion, some states may be able to enforce their regulations, especially if the borrower and the lender are located within that state’s borders. But developments in the immediate future may result in a federal oversight organization to settle and manage the online lending industry.

Do You Really Need a Payday Loan ?

Payday loan or cash advances, one of the most popular forms of short-term lending is growing immensely popular across the United States. It is legal and regulated in 37 states across the country. Most people borrow money for short-term requirements and the amount to be paid back is deduced from their next paycheck. One needs to offer minimal documentation in the form of salary or account information and having consistent flow of income to get the loan approved.

The flip side of payday loans is the high amount of interest rates and fees. The finance charges are usually in the range of 15 to 30 percent of the amount for two week period, which is equivalent to 390 to 780 percent APR (Annual Percentage Rate). Though payday loans are not really banned in the other 13 states of US, they are termed ‘illegal’ and not feasible according to state laws. These 13 states are Arizona, Arkansas, Connecticut, Georgia, Maine, Mainland, Massachusetts, New Hampshire, New Jersey, New York, North Carolina, Pennsylvania, Vermont and West Virginia.

The laws prohibit payday lending in the form of usury limits, which means that they are not allowed to levy high interest rates other than the limits set by the state. Since October 1 2007, a federal law was also instituted capped lending to military personnel at a maximum of 36 percent APR as stated by the Secretary of Defense.

Some payday loan lenders are also getting around usury laws in some states by forging relationship with nationally chartered banks based in a different state with no usury limits. Further, some of these lenders are also using threatening means to impose fear in the minds of the consumer by saying that non-payment can result in arrests and lawsuits. Even if they do not ask for credit check, they ask for confidential account information or ask for advance fees before the loan is lent. Some lenders have sought immunity from legal action saying that they are affiliated with North American tribes. The Federal Trade Commission (FTC) is bringing in a lot of consumer awareness on these points and are also putting pressure on the courts that stringent punishment and abolishing of licenses should be done on businesses that are working against Truth in Lending Act and using unethical business procedures.

At the end of the day, it boils down to self discipline and personal budgeting
. In 69 percent of the cases for first-time borrowers, it has been seen that payday loans are not really required for crisis; they are taken for urgent necessities. The fact that the borrower just needs to have a checking account and regular salary or income flow is tempting enough for many to take the plunge because money is available in just about 24 to 48 hours. For instance, the fee for a $100 loan is $15 but if the amount is rolled over for 3 times, the finance charge moves to $65. On an average, it has been seen that payday loans are paid in 18 days, which is more than two weeks, leading to higher financial charges.

The FTC says it is the duty of the consumer to ensure that he or she reads the disclosure agreement carefully. At the same time, the consumerist organization ensures that the payday loan companies abide by the state norms and laws. You can also check the ftv.gov website or contact them at1-877-FTC-HELP (1-877-382-4357); TTY: 1-866-653-4261 if you wish to report about any malpractice followed by a company or business organization that goes against consumer interests.