Payday loans allow borrowers to obtain short-term loans in exchange for deferred check deposits. If a borrower obtains a payday loan, he will write a check to the lender and obtain a cash advance in exchange for the promise to pay. The lender will not cash his check until the borrower’s next pay cycle, which is why they are “deferred deposits.” State laws govern payday lenders and regulate their lending practices.
California Department of Corporations
In California, the California Department of Corporations regulates their licensing. Typically, payday loan lenders profit from their loans by charging consumers extremely high rates of interest on their loans and allow them to renew or extend their loans. By extending a consumer’s payoff deadline, payday lenders earn additional interest. To help consumers against deceptive payday loan businesses, many states have implemented strict guidelines limiting the rates of interest they can charge borrowers, the number of times they can extend their loans and prohibit exorbitant finance fees.
The California Constitution places a cap on fees payday lenders can charge. A payday lender cannot charge more than 15 percent above the borrower’s check amount. The state’s legislature also imposes more stringent requirements on military dependents and service members. Although the annual percentage rate can vary based on the loan-term, the 15 percent cap is equivalent to a 460 percent APR for a 14-day loan, similar to many credit cards.
The California Constitution also places a cap on the loan amounts payday lenders can extend. The loan limit for a payday loan is $300 per consumer. Thus, a consumer who borrows the maximum allowable loan limit of $300 will pay up to $45 in interest. Additionally, to help protect consumers from predatory lenders, California law requires payday lenders to use contracts in the same language the borrower used during the original transaction. For example, if a borrower transacted business in Korean, the contract must be written in Korean. California payday loan lenders cannot charge a consumer more than one insufficient funds fee or bounced check fee, and their one-time bounced check fee is limited to $15.
The California Department of Corporations is responsible for licensing payday lenders. Each payday lender must first obtain a license from the department before it can conduct business. Payday lenders are legally required to provide consumers with notice of their licenses and fee schedules by posting their state-issued professional licenses in a prominent location at each of their business locations, which are easily visible to consumers.
Payday lenders in California cannot extend new loans to consumers with existing loan obligations. Furthermore, a payday lender cannot legally require a consumer to obtain a new loan to pay an existing payday loan. Payday lenders may not charge more than one fee for insufficient funds or bounced checks. They cannot threaten consumers with criminal prosecution, and they cannot charge additional fees when they extend loan terms. However, a payday lender is not required to extend the term of the loan. Californians can contact the Department of Corporations to file complaints against noncompliant lenders.