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The Laws on Payday Loans in Delaware

Payday loans are small, short-term consumer loans offered mainly by non-bank institutions and secured by a post-dated check.

There are no complicated credit investigations – all you need to do is show that you are actually employed. Because it’s tied to employment, these consumer credits usually fall due around paydays, thus earning their monicker payday loans.

Payday loans are popular because its very easy to get one. Most lenders do not even require continuous employment as a condition for granting an instant cash advance delaware payday loan. All they look for is a check and a job at the time of application.

There are no extensive background investigations made.

Those with low credit scores who cannot avail of loans from established banks and financial institutions run to payday loan lenders. Even delinquent debtors can qualify. Obviously, these are not the ideal candidates for any kind of loan.

No security is required other than a post-dated check. As a result, desperate people come to these establishments whenever they need money.

Payday loans have been around for over a century in the U.S. At the turn of the 20th, these store-front businesses were unregulated.

Without big Brother watching over them, they ran roughshod on their customers charging 3-digit annual percentage rates (APR) and using threats, intimidation and harassment as standard collection method.

Eventually, the federal government enacted a law that capped the interest rates on these consumer credits, which was later on adopted by a majority of the states.

Nonetheless, subsequent developments defanged the law. In the 50s, many of these consumer credit businesses went national, making state laws inadequate in regulating them.

Two decades later, developments in federal banking laws allowed many financial institutions to disregard state usury laws. This put a lot of local consumer credit businesses at a disadvantage. To help local lenders, a lot of states allowed them to offer consumer loans secured only by post-dated checks with triple digit APRs. This gave birth to payday loans that are widely popular these days.

Spurred mostly by the sky-high APRs that they were now allowed to charge, the payday loan industry grew exponentially. At the same time, their business practices became shoddier. They reverted to the practices of their forerunners. They lured unsuspecting client by allowing multiple rollovers. As the interest rates were high, debtors had no choice but to roll over and over again. And when their clients failed to pay, they harassed, threatened and intimidated them. The situation deteriorated and quickly escalated into a national crisis.

Delaware payday loans were no exception.

The APRs for payday loans in the state averaged well over 400%. Because of the excessive interests imposed, most debtors were forced to rollover their loans as they could not pay on their due dates.

There was no exception to the number of times that one could rollover or refinance, and soon these loans would snowball to sky-high amounts.

It was no wonder then, that debtors would default. There were reports of harassment, threats and even intimidation, although some opted to use the judicial system. In 2011, the State Justice of Peace Courts had over 2400 cases filed for payday loan defaults alone.

Mindful of the issues and problems of delaware payday loans, many state legislators buckled down and came up with different solutions. Thirteen states went totalitarian and banned payday loans outright in their jurisdictions.

Twenty-one state chose to compromise by merely prohibiting payday loan rollovers, but allowed the industry to continue. Some states established a statewide database that allowed them to track payday loans and study their progress and effect on the economy.

In Delaware, state legislators conducted hearings and meetings to find ways to break this vicious cycle of consumer debt. Although they acknowledged that payday loans have helped people especially in this economy, they were also concerned with the predatory practices of the lenders. To strike a balance, House Bill No. 289 was signed into legislation sometime in June 2012.

Instead of an outright ban, the law limits the number of loans a borrower can make. Legislators want their constituents to have a choice whether they would like to do business with payday loan lenders. They feel that there are instances when people will need these types of loans, and therefore should not be denied access to them. Banning them outright might just drive this industry underground.

Delaware, however, caps the number of payday loans one can make to 5.

This applies to loans of $1000 or less. Hopefully, this will provide relief without pushing the debtor into a financial quagmire. Every debtor will have a cap of 5 payday loans for a period of 12 months. After the period, a debtor has a fresh period to secure payday loans, if they so desire.

Legislators are aware that the ceiling is a short-term solution to a pernicious problem.

In order to get down to the root of the problem, they need actual data. Thus, the law also mandated the creation of a database that will track the number of payday loans that their constituents make. This database will hopefully provide the needed answer so that they can regulate the industry better. This will also pressure unscrupulous lenders to be more transparent in their business practices.

In addition, the State Banking Commissioner’s Office is mandated to study this payday loan problem. They are required to report to the General Assembly the nature of these loans.

They also need to inform the legislators how widespread payday loans are in the state.

A statewide study will show the legislators the extent of the issue and aid them in assessing whether the current laws are responsive to the problem. It will also help them determine whether there are additional measures that need to be taken at any given time.

In drafting these measures, the legislators hope that Delawareans will become aware that payday loans are merely stopgap solutions. Those who are deep in payday loan debt are extended a helping hand and pulled into the path of financial health. At the same time, the law looks to the future and tries to come up with lasting solutions to financial problems.