Price caps for payday loans are governed by state laws and were implemented to mitigate the risk of predatory lending. So where payday loans are legal, there are price caps of around 300% to 600% APR depending on the state, but where payday loans are not legal, it is capped strictly at 36% APR maximum.
What is the payday loan interest cap?
A payday loans interest cap is a limit on how much interest lenders are allowed to charge borrowers for taking out a payday loan.
The goal of an interest cap is to protect borrowers from excessively high interest rates in an attempt to make loans more affordable and also to deter lenders from predatory lending.
Interest caps mean that loan companies are less likely to profit from borrowers and they can receive more protection and can save significant amounts when they borrow money online.
What is the payday loan price cap in each US state?
|State||Max Interest Rate|
- Price caps on payday loans are designed to prevent predatory lending
- Interest rates for payday loans are known to be some of the highest around
- The price caps on interest rates protect borrowers from paying impossibly high interest
Why are there price caps on payday loans?
One of the main dangers of payday loans for bad credit is how relatively easy they are to obtain. Within recent years, especially due to the financial impact of the coronavirus pandemic, the volume of people seeking out payday loans has tripled.
Research from Gusto suggests that 98% of the workers who took out a payday loan in the last year had never taken out a payday loan before the pandemic.
Payday loans can be hard to pay back due to high interest rates. This leads to re-borrowing and, subsequently, entering a negative spiral of debt. The Consumer Financial Protection Bureau estimates that at least 1 in 4 payday loans are re-borrowed nine times.
With these loans so readily available, and the long-term negative impact they incur, it is easy to understand why price caps and other legislations are being introduced to protect vulnerable consumers.
How do price caps affect payday loan interest rates?
Over the past year, many states have begun to pay closer attention to the legislation surrounding payday loans, particularly payday lenders’ tendency to target financially unstable individuals and charging interest rates which are impossible to repay.
Payday loans are readily available across the majority of states, with nearly half of these states offering loans without any restrictions at all. For those states which are not legislated, loans are extremely easy to obtain requiring only a valid form of ID, proof of income and an existing bank account,
The Center for Responsible Lending, subsequently, wanted to push for more responsible lending practices across states.
Different states have different legislation regarding payday lending; some have a maximum limit on interest rates but some states operate without restrictions.
How are states preventing high APRs for payday loans and other interest rates?
Although some states have started to crack down on high interest rates, there are still many states with no legislation.
Payday loans are prohibited completely in 12 states and in 18 states, interest is capped at 36% on a $300 loan. For $500 loans, 45 states and Washington D.C. have caps in place but these vary from state to state and can be very high – the average is 38.5%.
In the states that do not have legislation, lenders are free to charge as they please. For example, in Texas, interest rates can be as much as 662% on $300 borrowed. If you are unable to pay back the original amount on the due date, interest will continue to accrue and you could be paying back triple what you originally borrowed.
In 2021, there was more effort being made to clamp down on predatory lending with Indiana, Tennessee, Virginia, Illinois & Minnesota implementing interest rates caps. Going forward, congress is working to bring the 36% interest cap across all states.
What other safeguarding is in place to protect consumers?
Since 2017, regulation has been in place to help protect borrowers, enforced by the Consumer Financial Protection Bureau. This includes forcing payday lenders to carry out more thorough affordability checks to make sure that the borrower can afford to take on this loan. However, under the Trump administration this need for more thorough underwriting was revoked.
Other regulation is in place including:
- Lenders cannot loan to consumers who have pre-existing short-term loans
- Lenders cannot use borrower’s car title as loan collateral
- Lenders cannot repeatedly attempt to withdraw money from the borrower’s bank account if there is no money
- Lenders are legally required to disclose the Principal Payoff Option to any borrowers
- Lenders can only extend loans for borrowers who have already repaid at least one-third of the principal amount