The map shows the typical APR in each state
In recent months, several states have moved to cap interest rates on payday loans in an effort to keep consumers from getting in over their heads with these traditionally expensive loans.
In November’s general election, Nebraska voters overwhelmingly voted to cap payday loan interest rates in the state at 36%. Before the ballot initiative passed, the average interest on a payday loan was 404%, according to the Nebraskans for Responsible Lending coalition.
In January, The Illinois state legislature has passed a bill that will also cap consumer loan rates, including payday and car title, at 36%. The bill is still awaiting Governor JB Pritzker’s signature, but once signed, it will make Illinois the last state (plus the District of Columbia) to cap payday loan rates.
Yet these small dollar loans are available in more than half of US states without many restrictions. Typically, consumers simply need to walk into a lender with valid ID, proof of income, and a bank account to get one.
To help consumers put these recent developments into perspective, the responsible credit center analyzed the average APR for a $300 loan in each state based on a 14-day loan term. Typically, payday lenders charge a “finance charge” for each loan, which includes service charges and interest, so consumers often don’t know exactly how much interest they’re paying.
Currently there are a handful of states (here in green) – Arkansas, Arizona, Colorado, Connecticut, Georgia, Maryland, Massachusetts, Montana, Nebraska, New Hampshire, New Jersey, New York, North Carolina, Pennsylvania, Dakota South, Vermont and West Virginia — and DC that cap interest on payday loans at 36% or less, according to CRL.
But for states that don’t have cap rates, the interest can be exorbitant. Texas has the highest payday loan rates in the United States. The typical APR for a loan, 664%, is more than 40 times greater than the average credit card interest rate of 16.12%. Texas’ position is a change from three years ago, when Ohio had the highest payday loan rates at 677%. Since, Ohio has imposed restrictions on loan rates, amounts and terms which came into effect in 2019, bringing the typical rate down to 138%.
About 200 million Americans live in states that allow payday loans without heavy restrictions, according to CRL. Even during the pandemic, consumers are still seeking these loans with triple digit interest rates.
The rate of workers taking out payday loans has tripled due to the pandemic, a recent Gusto survey of 530 small business workers found. About 2% of those employees said they had used a payday loan before the pandemic began, but about 6% said they had used this type of loan since last March.
While payday loans can be easy to get in some parts of the United States, their high interest rates can be expensive and difficult to repay. The research carried out by the The Consumer Financial Protection Bureau found that nearly one in four payday loans are re-borrowed nine or more times. Additionally, it takes borrowers about five months to repay the loans and costs them an average of $520 in finance charges, Pew Charitable Trusts reports. This is in addition to the original loan amount.
“In addition to repeat borrowing, we know there is an increased risk of overdrafts, loss of bank account, bankruptcy and difficulty paying bills,” says CRL researcher Charla Rios. Other research has shown that the stress of high-cost loans can also have health effects, she adds.
“People are under financial pressure right now and we also know the results and harms of payday loans, so payday loans are not a solution right now,” Rios said.
To verify: Nebraska becomes latest state to cap payday loan interest rates
Don’t miss: The Best Credit Cards for Building Credit of 2021