How Features of Payday Loans Vary by State Regulation

The payday loan industry is subject to state regulations and, in effect, the costs associated with these products vary geographically. These variations mean that borrowers in different states assume different costs—and different financial consequences—associated with payday loans. For example, states set different caps on interest rates and the amounts that a consumer can borrow. They may limit the number of times a borrower can roll over a loan. Some states have made the shift to installment loans that require that the loan be broken up into several smaller, more affordable payments. Other states, under pressure from consumer advocates, have placed major restrictions on or outlawed payday loans altogether.

The high price that low-to-moderate income borrowers pay to use payday loans can undermine their financial well-being.

The maximum loan amount, finance fee, and the number of rollovers are important features of a payday loan. Theoretically, regulations should play a role in how lenders choose the features of their payday loans and, given differences in state regulations, these features should vary. This report reveals how these regulations operate in practice by examining payday loans’ maximum amounts, finance fees, and rollovers from a sample of 442 payday lenders with attention to variations between state regulations. 

Key Findings

Lenders use state regulations to anchor the features of their payday loans. Lenders use regulations to set their maximum loan amount as high as permissible, which suggests that regulations are effective at capping loan amounts.

• In states that regulate the maximum payday loan amount, lenders consistently report loan amounts that match their states’ regulations.
  
• There is wide variation within states that do not regulate the maximum amount of payday loans. For example, lenders in the state of Texas report maximum loan amounts that range from $255 to $3,000.

Payday lenders in states that do not place restrictions on interest rates have a larger variance in the amounts of interest that they charge.

• The average cost in interest on a $100 payday loan ranges from $1 to $45; though, the average cost is $24 among states without interest rate regulations and $17 among states with regulations.
  
• Finance fees in the state of Idaho, for example, range anywhere from $20 to $42 per $100 loan. In Ohio, because of loopholes in state regulations, lenders are able to charge anywhere from $1 to $35.

Payday lenders allow fewer rollovers than permissible by state regulations, suggesting lenders could be trained to not advertise rollovers to potential borrowers or that they could be moving away from this practice.

• Of lenders in states that allow rollovers, nearly half allow five or more rollovers.
• For example, most lenders in Missouri allow six rollovers, which is the maximum amount allowed per state regulations.