What Happens When Payday Loans Are Outlawed?

Inside Subprime: Dec 11, 2018

By Grace Austin

The outlawing of payday loans in many states means fewer borrowers in an endless cycle of debt, according to some consumer advocates.

Payday loan and title loan firms have been accused of trapping millions of borrowers in cycles of debt, leading to several states and the District of Columbia passing laws essentially outlawing them. But often the statutes’ language does not explicitly ban payday and title loans, meaning the laws can be open to interpretation and potential loopholes.

The states that currently prohibit payday loans are Arizona, Arkansas, Connecticut, Georgia, Maryland, Massachusetts, New Jersey, New York, North Carolina, Pennsylvania, Vermont, West Virginia, and the District of Columbia. Some states have explicitly banned payday and title lending, others have laws on the books that essentially outlaw payday and title loans, and other states hold lenders to an interest cap that prohibits payday and title loans.

Many of the statutes against payday lending have been enacted or updated within the past 10 years, as studies showed more borrowers, particularly low-income individuals, began to rely more heavily on payday loans for basic financial necessities.

One Arkansas study was conducted seven years after the state Supreme Court made payday loans illegal, in late 2008. It showed that borrowers believed they were “better off” without accessible payday loans and that they now use “safe,” better alternatives when financial hardships hit. The study stated that “payday lending is a high-priced convenience,” and that, without them, borrowers worked more, received loans from friends or banks, or used credit cards instead of payday loans.

North Carolina made payday loans illegal in 2001. While industry advocates said it would create a void for those with few credit options, one study showed that in North Carolina “small loans from consumer finance companies, credit unions, and other financial institutions have flourished while charging rates at or below the rate cap.”

The District of Columbia repealed its payday loan law in 2007, making them explicitly illegal. A Washington Post article reported that soon after, in the District, many credit unions stepped in “to offer small-dollar loans with reasonable rates and longer repayment terms.”

Consumer advocates say that banning payday loans leads to borrowers keeping millions more in cash. In 2016, they estimated the amount saved from payday loans to be more than $3.5 billion across the country.

Still, some academics have found ambiguous results with regards to borrowers’ financial well-being after payday loans were banned; one paper compiled various arguments and couldn’t prove definitively whether those without access to payday loans anymore were better off or worse than before.

Despite efforts by states to make payday and title loans illegal, there is no federal ban. But other payday loan alternatives have started to grow, leading to greater options for those in a tight financial situation.

For more information on payday loans, scams, cash advances and title loans, check out our state-by-state financial guides.