Payday loan companies may help provide necessary cash to desperate consumers facing emergencies, but they may do more harm than good. Payday loans are short-term loans made by payday lenders that typically carry high interest rates. The term “payday loan” earns its name from the way payday lenders make their loans. In exchange for quick cash, a borrower pledges her paycheck as collateral for the loan.
Many states enacted legislation prohibiting payday lenders from charging more than the statutory interest limits set by state legislatures. In Virginia, the General Assembly passed new legislation in 2008 amending the existing Payday Loan Act. The Virginia Legislature also broadened the scope of the existing Virginia Consumer Protection Act to regulate payday loan companies. The new legislation caps the interest rates and fees payday lenders operating in Virginia can charge consumers.
Although the Virginia Code sets interest caps on allowable interest rates for most types of contracts and judgment collections, it may not apply to payday loan lenders. Payday lenders may be considered business lenders who are exempt from the commonwealth’s general usury limits. However, payday lenders must comply with the commonwealth’s licensing regulations and obtain valid licensing to conduct business as payday lenders. Furthermore, the Virginia Payday Loan Act requires the following:
1. Payday loan lenders cannot renew loans or extend payday loans.
2. Payday loan lenders cannot make payday loans on the same day borrowers receive their entire paychecks.
3. Payday loan lenders cannot garnish a military service member’s paycheck.
4. Payday loan lenders must use the commonwealth’s payday database to ensure a customer does not have more than one payday loan at once.
5. At the date of publication, payday loan lenders cannot charge more than 36 percent interest on their payday loans; AND they may not charge more than 20 percent or one-fifth of their loans in interest.
6. Payday loan lenders cannot charge more than $5 for verification or database fees.
7. Consumers must have at least two pay cycles in which to repay their loans.
Failure to comply with the Virginia Payday Loan Act carries stiff penalties for payday loan lenders who may be charged with a Class 6 felony. A Class 6 felony in Virginia carries criminal or monetary civil fines.
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