Laws for Payday Loans in Vermont

Payday loans are short-term loans with annual rates of interest in the triple digits. Unlike longer-term loans, payday loans are meant to hold the borrower over for a short time until he receives an infusion of income. Often, high rates of interest plus additional fees for late payment can leave a delinquent borrower owing many times the amount of his original loan. As of December 2010, Vermont numbers among the few U.S. states that has effectively outlawed payday lending in the state.

Small Loan Act

Under the Small Loan Act, lenders cannot charge borrowers in Vermont an APR of more than 18 percent. This applies to both larger lenders, such as banks, and to small lenders, such as payday loan companies. Given that payday loan companies make a profit by charging customers amounts far in excess of this, Vermont is not home to any payday loan companies. These rules also apply to online payday loan companies doing business with Vermont residents.

Effects

If a loan is issued in Vermont in which the interest rate is found to be in excess of 18 percent, one of two things will occur, depending on the judge hearing the case. One, the loan will be voided, as it is illegal. Or, the lender and the borrower may be required to modify the agreement so that the money is paid back at a lower rate of interest.

Additional Laws

Although Vermont restricts the interest rate and penalties that payday lenders can charge customers, it does not restrict the size of a short-term loan, nor the number of loans a borrower can take out simultaneously. However, Vermont does restrict all lenders attempting to collect on a debt from filing criminal charges against a delinquent borrower, unless the lender can show the borrower acted fraudulently in taking out the loan.

Loopholes

Although payday loans are technically illegal in Vermont, there is a loophole that lenders can use to charge higher rates of interest. According to Vermont law, an out of state bank is allowed to set up shop in Virginia and charge customers the interest rates of the state where the bank is headquartered. Payday loan companies are technically allowed to purchase charters from these banks and establish "branches" where they charge exorbitant interest rates.