In the U.S., interest rate caps—especially when it comes to protecting consumers from predatory lending—are largely regulated at the state level. This means that the maximum interest rates lenders can charge vary depending on which state you live in and the type of loan we’re taking out. Let’s break down how this works across different states.
What Qualifies as a “Predatory Loan”?
First, let’s compare a traditional loan you would get from a bank versus a “predatory loan” you would get from an alternative lender:
| Feature | Traditional Bank Loan | Predatory Loan |
| Interest Rate | Low to moderate (typically 3% to 12% APR) | Very high (can exceed 50% APR, sometimes 300%+) |
| Loan Terms | Fixed terms (usually 1 to 30 years) | Short terms (often 2 weeks to a few months) |
| Repayment Structure | Monthly payments, often with amortization | Lump-sum payment or frequent, high payments |
| Fees and Charges | Transparent, disclosed upfront | Hidden fees, high fees, or penalties |
| Borrower Qualification | Strict requirements (credit score, income, etc.) | Minimal qualification (often no credit check at all) |
| Regulatory Oversight | Highly regulated by federal and state laws | Often operates in regulatory gray areas |
| Purpose of Loan | Typically for major purchases (homes, cars, education) | Often for emergency or short-term needs |
| Impact on Credit Score | Positive impact if paid on time, reported to credit bureaus | Negative impact, often not reported positively to credit bureaus |
| Borrower Rights | Strong consumer protections, recourse available | Limited recourse, predatory practices common |
| Rollover/Renewal | Generally not allowed or unnecessary | Frequent rollovers, trapping borrowers in cycles |
| Lender’s Intent | Long-term relationship, repayment is expected | Profit from borrower’s inability to repay on time |
Essentially, a predatory loan is a type of loan that takes advantage of borrowers in vulnerable and dire financial situations. These loans often come with excessively high interest rates, hidden fees, or deceptive terms that make it difficult for borrowers to repay the loan.
Federal Protections
Before diving into state specifics, it’s worth noting that there is a federal cap in place for certain groups. The Military Lending Act (MLA) caps interest rates at 36% APR for active-duty service members and their dependents on most consumer loans. This law provides a strong layer of protection, but it only applies to military members. You can learn more about the MLA on the Consumer Financial Protection Bureau (CFPB) website.
State-Level Interest Rate Caps
Interest rate caps for everyone else are set by state laws, and these can vary widely:
- California
- Payday Loans: In California, payday lenders can charge up to $15 per $100 borrowed, which can equate to an APR of over 400% depending on the term of the loan.
- Installment Loans: For loans over $2,500, there’s no cap on interest rates.
- More Info: Check out California’s Department of Financial Protection and Innovation for detailed regulations.
- Colorado
- Payday Loans: Colorado has one of the stricter caps, limiting payday loan interest rates to 36% APR. This was implemented after voters approved a 2018 ballot measure to curb high-interest payday loans.
- More Info: Visit the Colorado Attorney General’s Office for more details on payday loan regulations.
- New York
- All Loans: New York has a strict usury law that caps interest rates at 16% for most types of consumer loans. Charging above 25% is considered criminal usury.
- More Info: For more on New York’s laws, the New York State Department of Financial Services is a good resource.
- South Dakota
- Payday Loans: Like Colorado, South Dakota caps payday loan rates at 36% APR. This cap was set after a successful 2016 ballot initiative aimed at protecting consumers from predatory lending practices.
- More Info: Learn more on the South Dakota Division of Banking website.
- Texas
- Payday Loans: Texas doesn’t cap interest rates directly for payday loans, but it does regulate fees. This can still lead to APRs that exceed 400%, depending on the loan’s terms, which is extremely high.
- More Info: The Texas Office of Consumer Credit Commissioner provides more information on lending laws in the state.
- Illinois
- All Loans: As of 2021, Illinois capped interest rates at 36% APR for all consumer loans, including payday loans, through the Predatory Loan Prevention Act.
- More Info: Check out the Illinois Department of Financial and Professional Regulation for more on this.
- Florida
- Payday Loans: Florida caps payday loan fees, effectively limiting the APR to around 304% for a typical two-week payday loan.
- More Info: Visit the Florida Office of Financial Regulation for details.
- Utah
- All Loans: Utah has no cap on interest rates, making it one of the most lender-friendly states in the U.S. This means payday lenders and other high-interest lenders can charge extremely high rates. Beware of Utah-based lenders.
- More Info: For more, see the Utah Department of Financial Institutions.
Know Your Rights & Do Your Due Diligence
These state-specific laws are crucial because they determine how much protection you have against predatory lending practices. In states with strict caps like New York or Colorado, consumers are generally safer from exorbitant interest rates. But in states like Utah or Texas, the lack of caps means consumers need to be extra cautious when taking out loans.
Predatory loans have put many American consumers in dire financial situations, exacerbating their debt and pushing them into bankruptcies. If you are dealing with high debt and are struggling to pay your bills, consider debt settlement instead of requesting another loan which will most likely put you deeper into debt.
Finding Out More
If you’re considering taking out a loan, it’s a good idea to first check what the interest rate caps are in your state. You can usually find this information through your state’s Department of Financial Services or a similar regulatory body. Additionally, the Consumer Financial Protection Bureau (CFPB) offers a wealth of resources on consumer rights and protections.
By understanding these caps, you can better protect yourself from predatory lending practices and make more informed financial decisions.
Amine is an entrepreneur, investor and financial writer that covers the US economy, inflation, alternative investments, cryptocurrencies and more. He has been involved in the space for over a decade.
