Protection Against Payday Loans and Predatory Lending

If you’re facing financial hardship, you might think a short-term loan is the answer to your problem. Unfortunately, payday lending can become a debt trap for borrowers. Payday loans can lead you into deeper financial trouble.

Payday loans are a form of predatory lending. Predatory lenders use unfair, deceptive, and even fraudulent lending practices to make loans to borrowers strapped for cash. If you’re a victim of payday loans and predatory lending, talk to a consumer protection lawyer about your options.

Payday Lending

Payday loans are short-term, high-interest loans with a short repayment period. The loans are small-dollar loans, and a typical loan limit is $500. A payday loan is usually repaid in full on your next payday or from another income source such as your Social Security or pension payment. Depending on state law, payday lenders can be found online or through a “bricks and mortar” storefront.

You generally write a post-dated check for the entire balance, including finance charges, or you give your lender permission to electronically withdraw funds from your bank or credit union account to repay the loan.

Payday lenders don’t require a credit check, so the borrower’s ability to repay the loan isn’t considered. However, payday loans are high-cost loans. Fees range from $10 to $30 for every $100 borrowed.

Although the loans are often paid in one lump sum, some states allow lenders to renew or roll over the loan when it’s due. This means you only pay the fees, not the entire loan amount. Some payday loans, however, are paid back in installments.

Predatory Lending

Predatory lending means you have a loan with unfair, even abusive terms. The loans come with high interest rates and excessive fees. They’re most often found in low-income neighborhoods.

Examples of predatory lending include:

• Payday loans
• Rent-to-own schemes
• Vehicle title loans

Vehicle title loans use your vehicle, such as a motorcycle or car, as collateral. The loan amount is often 25% to 50% of the vehicle’s value.

The Consumer Financial Protection Bureau (CFPB) oversees lending practices and enforces federal laws against predatory lending. The CFPB monitors payday lenders and financial services institutions to ensure they follow federal regulations.

Legal Protections

Payday lending and predatory loans are regulated under state and federal laws. State and federal governments have implemented laws and regulations designed to protect consumers.

Truth in Lending Act

The Truth in Lending Act (TILA) protects you from unfair lending. The TILA requires that lenders disclose their finance charges. It requires that lenders inform borrowers of the financial charges associated with their loans. Lenders must disclose the total cost of the loan, including the annual percentage rate (APR) and all fees. The TILA aims to provide transparency that helps you make informed decisions before agreeing to loan terms.

Some states have their own Truth in Lending laws. State versions of the TILA commonly disclose key information to protect consumers in credit transactions.

Fair Debt Collection Practices Act

The Fair Debt Collection Practices Act (FDCPA) protects against abusive debt collection practices and unlawful credit reporting. There are limits on when and how debt collectors can contact you. They can’t call you around the clock. They can’t call you too often and must stop contacting you if you ask them to do so.

Many states have their own fair debt collection practice laws that could offer even more help.

Military Lending Act

Members of the military have special protection from predatory lending because of the Military Lending Act. Servicemembers can’t be charged an interest higher than 36% on consumer loans, and allotments aren’t mandatory.

State Laws on Payday Lending

Many states have laws that regulate payday and predatory lending, which provide additional protection to consumers. Some states have a ban on payday lending, but it’s not available in all states.

About 37 states allow payday lending. In these states, the cost of the loan, fees, and the maximum loan amount are often capped. For example, some states have usury laws that limit interest rates to a 36% annual percentage rate. Some states have a cap on the amount borrowed in a payday loan. Some states restrict the number of times a loan is rolled over or renewed. These limits are in place to protect borrowers from becoming trapped in debt.

Recent Efforts to Combat Predatory Lending

A new payday lending rule goes into effect in March 2025 that limits payday lenders to two attempts a day to withdraw money to pay back the loan. This CFPB rule came about because a payday lender attempted 11 times in one day to withdraw funds from a borrower’s account, causing the borrower to incur overdraft fees for each attempt. The case went all the way to the U.S. Supreme Court.

Payday Loan Alternatives

Try to find an alternative to payday loans. Steer clear of predatory lenders by using the following:

• Credit unions
• Personal loans from family or friends
• Community assistance programs

Some state and federal credit unions offer payday alternative loans (PAL). These lower-interest-rate loans can range from $200 to $1,000. They’re often installment loans with loan durations of one to six months.

What To Do if You Have a Predatory Loan

Payday and predatory loans are expensive. They’re often debt traps and can lead to a damaged credit score. You can take the following steps if you think you have a predatory loan.

1. Try to negotiate the loan terms
2. Review the loan terms and check for violations of lending laws
3. Contact a consumer protection agency or attorney
4. File a complaint with the CFPB

Get a Consumer Protection Lawyer’s Help

With their high interest rates and excessive fees, payday loans can worsen a financial crisis. But you have rights if you’re the victim of predatory lending. Contact a local consumer protection lawyer for legal advice and guidance if you think a lender is taking advantage of you.