At first, a person needs money until the next payday for unforeseen expenses. Then he has difficulty paying off the loan and gets an extension. Because of the high interest rate on payday loans, the loan grows too large, and the borrower files for bankruptcy. This is the plight of many people, so the state of California has passed laws that restrict the use of payday loans.
Licensing Requirement
All payday lenders must be registered with the state of California. This will enable potential borrowers to identify companies from whom they can take out a payday loan and to file a complaint, if necessary.
Loan Size and Interest Rate
California laws set a limit on such loans at $300. A lender also is prohibited from charging in excess of 15 percent per week on such loans. Therefore, if someone borrows $300 for a week, the interest he will pay is $45. He will receive $255 after the interest is deducted from the amount borrowed. This equates to an annual percentage rate on a two-week loan of 460 percent.
Maximum Time
Under California law, a loan of this type must come due on the borrower's next payday. This time limit may not exceed 31 days.
More Restrictions
California prohibits a payday lender from making an additional loan to a customer until she pays off an existing loan. Furthermore, although difficult to monitor, a customer of one payday lender should not go to another for a loan to pay off an existing payday loan. Also, if a check to pay off a payday loan is returned because of insufficient funds, the amount that can be charged may not exceed $15. This is in addition to bank charges.
No Threats
A payday lender may not charge additional interest if it grants a request for more time to pay off a loan. Also, if a check is returned due to insufficient funds, the payday lender may not threaten the borrower with criminal prosecution. Finally, the note the borrower receives from the payday lender should be easy to understand and in the same language the borrower used when he applied for the loan.
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