California state law allows payday loans, but with certain restrictions. The repayment term for these loans cannot exceed 31 days, and lenders are not allowed to charge any extension fees. However, they are not obligated to provide an extended repayment plan, even if requested. Melissa Mendez, 26, experienced financial pressure and decided to take out a payday loan from a Cash 1 store in Sacramento.
There are other options available, such as cash advance applications, alternative payday loans from federal credit unions, and personal loans from lenders who work with people with less-than-perfect credit. The Consumer Financial Protection Bureau (CFPB) is a federal organization that protects consumers from abusive financial institutions, including payday lenders. Some Republican lawmakers and supporters of law-abiding payday lenders argue that capping rates would make it difficult for storefronts to continue providing these types of unsecured loans. This loophole, combined with the difficulty of tracing businesses over the Internet, makes borrowers vulnerable to all kinds of illicit payday lending activities.
Payday lenders usually cash post-dated checks from the borrower, so legislation enforces this limit by restricting the nominal amount of the check. With Earnin, the amount you borrow is automatically deducted from your checking account on the next payday. Although some states have outlawed payday loans, California still allows a regulated form of this practice. This is usually the case in states where payday loans are legal and competition here isn't even close.
It's hard to repay a payday loan and keep up with normal living expenses, so payday loans often force borrowers to take out another high-interest loan, over and over again. Despite evidence that payday loans tend to trap borrowers in a debt repayment cycle, most states' payday loan laws explicitly allow the industry to continue or not eliminate it. It may sound good, but those lenders may ignore the law on interest rates, loan amounts and fees, taking advantage of consumers who are not familiar with their rights under California law. The state says the average interest rate for payday loan transactions was 377 percent last year, a slight increase from the previous year.
New York prohibits payday loans through criminal usury laws, which prohibit interest on loans of 25 percent or more. Surprisingly, given its liberal leanings, California has been welcoming payday loans for decades. Interest charges for an overdue balance on California payday loans are capped at 15%, but initial charges can be equivalent to a rate of nearly 500%.