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California Usury Laws: Payday Lenders

Usury: an unconscionable or exorbitant rate or amount of interest; specifically: interest in excess of a legal rate charged to a borrower for the use of money (Merriam-Webster, 2014).

It is only natural for those who don’t meet the qualifications of major lenders to seek reasonable alternatives for a loan. The borrower may have bad credit or low income or they may be completely devoid of any securable assets. This will naturally lead the uninformed borrower to fall victim to those “Fast Cash” and “Quick money” payday lenders. These payday lenders offer loans for small amounts, without undergoing any substantive financial background check.

How it works is that, although every payday lending “practice” is different, typically a borrower obtains necessary funds from the lender by writing a personal check to the lender for the amount received plus interest, with a post-date on the check for the due date of the loan. These loans are usually for short terms (2 weeks or so) and when the duration of the loan concludes, the lender is repaid by depositing the borrower’s check. (Christopher L. Peterson, Usury Law, Payday Loans, and Statutory Sleight of Hand: Salience Distortion in American Credit Pricing Limits, 92 Minn. L. Rev. 1110, 1123 (2008).)

This payday lending practice has been allowed because California usury laws have been shaped and formed in a way where payday lenders can continue their practice with no real legal ramifications. Under current California usury laws (article XV of the California Constitution), there is a payday loan exemption meaning that payday lending institutions are exempt from California usury law regulation. This exemption means that instead of these payday lenders being regulated by the state, they are instead regulated by the California Department of Business Oversight. This exemption leads to a growing number of upset payday borrowers, who now face more debt than before, potentially extending several years.

Be cautious of these of “payday/fast-cash” lenders and be smart by protecting you and your family. Current California law does not view a payday loan as usurious, no matter how egregious the loan’s interest rate becomes.


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