Not only should you beware of payday loans in general, but you should also be especially wary of lenders that might be skirting state law by associating themselves with a Native American tribe, going through a state with looser lending laws, or operating offshore. Before you apply for a payday loan under any of these circumstances, you should fully understand how these loans work, consider the costs involved, and know that lenders could be illegally taking advantage of you. You might change your mind about getting one.
Payday loans are short-term loans for smaller amounts—typically $500 or less—which you have to repay in a single payment on your next payday or when you get income from another steady source, like a pension or Social Security.
Depending on your state’s laws, you might be able to get a payday loan in a store by giving the lender a postdated check, in person by providing the lender access to your bank account, or online. (To get details about these transactions, see How Payday Loans Work.)
The annual percentage rate (APR) on payday loans often ranges from 200% to 500%—or even higher. Triple-digit APRs are the norm when it comes to payday loans, which is exponentially higher than what traditional lenders typically offer.
To reign in payday lenders, some states have laws that limit the interest rate a lender can charge, regulate the repayment period, or restrict how much a borrower can get. Other states have gone as far as making payday lending illegal. (Learn about the costs and risks associated with payday loans.)
Payday lenders sometimes associate with Native American tribes, cross state lines, or operate offshore to avoid having to follow state laws. (Read about options to avoid when you need money, including payday loans.)
Associating with Native American tribes. Usually, you should beware of payday lenders who've affiliated themselves with Native American tribes. These lenders often claim they don’t have to comply with state laws because of sovereign immunity. (Generally speaking, under the doctrine of tribal sovereign immunity, a tribe can’t be sued by a state, a private party, or other governmental authority unless the tribe consents or Congress allows it.)
Here's how this kind of set-up works: A payday lender teams up with a Native American tribe—usually a small, cash-strapped one consisting of around a few hundred members—then offers loans over the Internet, ignoring state interest-rate caps and other laws that restrict payday lending by claiming sovereign immunity.
Often this practice is illegal, and courts are increasingly cracking down on rent-a-tribe affiliations.
Internet-based payday lenders. Some Internet-based payday lenders conduct online transactions across state lines claiming that they don’t have to comply with state laws and licensing requirements. In response, some courts have upheld a state’s right to regulate out-of-state, Internet-based lenders that make loans to that state’s residents—even when the lender does not have a physical presence in the state. In fact, courts frequently reject payday lenders’ attempts to avoid complying with state law by claiming that another state’s law applies.
Offshore lenders. Other online lenders operate their business from overseas, which makes it difficult, if not impossible, to enforce state laws.
To find out about the payday lending laws in your state, see the National Conference of State Legislatures website. To get an explanation about applicable payday loan laws, consider contacting a consumer protection lawyer.