Payday loans are legal in 37 of the 50 US states. Due to the nature of this financial product, there are lots of regulations in the states where citizens can borrow money today through payday loans. Regulations do however vary between each state and are designed to prevent customers from falling into any financial difficulties. 


Key points:

  • Residents living in 37 of the 50 US states are able to legally borrow payday loans. 
  • The 13 states that prohibit payday loans include Arkansas and New York.
  • Regulation varies by state, with some having maximum loan amounts or loan terms.
  • Some states allow customers to take out a maximum of 1 or 2 payday loans at any time.
  • Payday loan regulations have recently increased to prevent borrowers from being exploited. 


What Are Payday Loans?


Payday loans help those in need of urgent funds to get a cash advance before they receive their next paycheck. They aim to alleviate financial pressures if a customer needs quick cash and cannot wait till their payday to pay for an important bill. It is intended that as soon as the borrower receives their next wage, they will then repay back the loan.

Payday loans are commonly used to pay for medical expenses, dental fees, home or car repairs or funeral costs to name a few. Since there is high interest and fees involved, it is always essential that the borrower is certain they will be able to meet repayments before taking one out. Payday loans should not be used as a long-term financial solution or to pay for outstanding debt, but rather to deal with an unexpected and short-term cost. 




In Which US States Are Payday Loans Legal?


There are 37 states in which US payday loans are legal. Colorado, Illinois, Indiana, Iowa, Kentucky, Maryland, Ohio and Tennessee are examples of a few. 

The most in-demand payday loan states are California, Nevada and Texas. For instance, nearly 8% of all Texans have taken out a payday loan in their lifetime.


In Which US States Are Payday Loans Illegal?


Payday loans are illegal in 13 states. These include Arizona, Arkansas, Columbia, Connecticut, Georgia, Maryland, Massachusetts, New Jersey, New York, North Carolina and Vermont. Within these states, payday lenders are not allowed to offer payday loans in-person, by telephone or over the internet. 


What Regulations Exist For US Payday Loans?


Payday lending states have varying levels of regulation. This includes how much customers are allowed to borrow and how much interest lenders can apply to loans. 

The following table provides some examples of the payday loan regulations in a few of the US states where they are legal. 

States Maximum Loan Amount Maximum Loan Term Finance Charges
Alabama $500. Not less than 10 days and not more than 31 days. Interest must not exceed 17.5% of the amount advanced.
New Hampshire $500. Not less than 7 days and not more than 30 days. APR must not exceed 36%.
Oregon $50,000. Not less than 31 days and not more than 60 days. Interest must not exceed 36% per annum. Rules for origination fees also apply.
South Carolina $550. Not more than 31 days. Interest must not exceed 15% of the amount advanced.
Washington $700 or 30% of the gross monthly income of the borrower, whichever is less.  Must be a date after the borrower’s next payday. If the borrower’s next payday is within 7 days then it must be due a date after the borrower’s second payday. It should still be within 45 days of taking out the loan. Interest must not exceed in the aggregate 15% of the first $500 of principal. If the principal exceeds $500, a licensee may charge interest or fees not to exceed in the aggregate 10% of that portion. If a lender gives an additional loan to the borrower and all the loans together exceed $500 at any one time, the licensee can charge interest up to 10% of the aggregated amount.  

Source: National Conference of State Legislatures


There are also different regulations on how many loans can be taken out at once. For instance, Washington and Virginia have restrictions on how many payday loans can be borrowed at a time. The Consumer Financial Protection Bureau are working to try prevent borrowers from being able to take out multiple loans at once due to the costs involved and the potential risk of financial troubles they can cause. 


Why Are Payday Loans Regulated?


Payday loans in states where lending is legal are highly regulated. The regulations intend to protect borrowers so that they do not accrue high debts.

Due to the nature of payday loans involving high interest, the regulations stop borrowers from taking out unlimited money that can become very difficult to pay back. This could lead to a negative impact on the customers credit score or legal action if they fail to meet repayments. So regulators seek to avoid this, and also stop customers from being charged excessive fees that could cause financial difficulties. 

The Consumer Financial Protection Bureau makes sure that consumers are protected by disciplining any lenders who violate the regulations. This was achieved through Federal Regulation known as ‘The Dodd-Frank Wall Street Reform and Consumer Protection Act’.


How Can I Check That A Payday Lender Follows US Regulation?


It is always possible to check that the lender you are considering to use is regulated by checking the SEC register or the Online Lenders Alliance. You could also look up their status with the Better Business Bureau.

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