How Online Payday Loan Lenders Bypass State Payday Laws

If you’re wondering how payday loan lenders bypass state payday laws, keep in mind that these lenders tend to be a wily bunch. Short-term loans produce major profits for lenders. Because of this, payday loan companies often change their business models when legislators attempt to rein them in. Tom Feltner, an associate of the Consumer Federation of America, said, “Borrowers online have a dizzying amount of choices for payday loans. One of the biggest concerns is that those loans are not all regulated. They don’t always comply with consumer protection laws in the states where they operate.”

How Payday Loan Lenders Skirt State Regulations

According to Investopedia, when states enact regulations to control the interest rates and fees that payday loan lenders impose on borrowers, short-term loan companies find ways to evade them. Often, states have usury exclusions for funds that are loaned through foreign entities. These exemptions may extend to lenders that have incorporated outside of a state where a borrower resides. This gives payday loan lenders a way around laws put in place by a particular state.

Despite interest rate limits, payday loan lenders have found a loophole that allows them to charge annualized interest rates that range between 200 percent and 500 percent. They do this by calling the interest that they charge a “service fee.” In many states, service fees are not subject to the same regulations as interest rates.

Avoiding Regulations with a Change of Locale

Payday loan lenders are moving their main operations out of states that won’t let them use the service charge loophole and into states without the restrictions. South Dakota does not have a usury limit, so a short-term loan lender located in the state could lend funds to a borrower in California, which does have usury limits, through an online transaction. In this situation, the loan terms would be based on what is permitted in South Dakota instead of California.

Payday loan lenders that operate online can make loans without acting in accordance to the licensing requirements or other consumer protections of a borrower’s home state. By law, physical shops must display a license to lend money. Online loan companies must also have a license, but to verify it, borrowers will need to wade through the site’s fine print. Companies that don’t display or mention a license may be operating against the law.

Online lenders can be tough to locate or contact after a loan agreement is made. Some companies use anonymous domain registrations. Today, some of them even have their headquarters located outside of the United States. This can make it tough for borrowers to dispute a fee or the repayment terms of a loan.

The Fastest Growing Division of the Payday Loan Industry

The Huffington Post confirms that online lenders are the fastest growing division of the short-term loan market. Companies that lend through online methods make up about a third of the payday lending industry. Statistics show that the revenue of this segment tripled from $1.3 billion in 2006 to more than $4 billion seven years later. When people borrow from online lenders, they are more likely to accrue overdraft charges on their bank accounts than those who select storefront lenders. Online loan borrowers are also more likely to default on these loans than they are when they sign an agreement with a brick-and-mortar store.

The Consumer Financial Protection Bureau, or CFPB, is proposing federal rules for the industry. These regulations will be in place for companies that operate through a physical site as well as for businesses that process online loans.

How Online Loans Differ from In Person Ones

A borrower who turns to a brick-and-mortar store for a loan usually writes a post-dated check to the lender for the repayment amount and date. Online lenders require access to a borrower’s bank account to withdraw the repayment funds automatically. Borrowers may be able to secure an online loan with a post-dated check, but the application process and fund transfer will likely take longer. Brick-and-mortar stores loan a borrower cash while online lenders transfer funds electronically into the consumer’s bank account.

Many Consumers Have a Lack of Borrowing Options

Consumers who have no or poor credit histories as well as limited incomes suffer from a lack of borrowing options. When it comes to lending funds, banks are notoriously restrictive with those who have bad credit. Peter Barden, an Online Lenders Alliance spokesperson, said, “Since the financial crisis, banks have tightened their lending requirements. For consumers in need of a couple thousand dollars to make ends meet, they have nowhere else to go.” To read more about how payday loan companies find ways around state laws, visit the

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