Have you ever thought about trying to make some extra money by going into the loan sharking business?
While it is possible to do this if you have some unallocated savings and are willing to explore the risks and opportunities of the underground economy, these days most people who want to earn high rates of return by lending money but are not wealthy enough to gain control of a bank become what are known in the United States as payday lenders. Equipped with the right amount of knowledge and funding, these people can set up relatively small businesses that offer a type of niche financial product in the form of payday loan services. By lending money to borrowers who have some type of regular employment and a verified bank account, they can gain enough protection against defaults to keep them in business while retaining the ability to charge relatively high annualized rates of interest on their short term loans.
Unfortunately, sensationalism in the media about high yearly rates combined with the rather questionable practices of certain payday lenders have drawn the ire of various consumer advocacy groups along with much of the general public who often sympathizes with the borrowers of these supposedly “predatory” loans. This kind of sentiment has led to legislation being passed that attempts to limit the amount of interest or fees that lenders can charge in many states, which has had the effect of creating an eclectic patchwork of state laws, regulations, and loopholes with which the aspiring loan shark would do well to keep abreast.
In 17 states and the District of Columbia loan sharking has been made especially difficult because of low usury caps or even outright criminalization of certain types of loans, which has effectively banned payday lending services in these states (payday lenders who cannot charge above a certain rate on their loans cannot stay in business because of losses from defaults by irresponsible borrowers). Meanwhile, the other 33 states specifically authorize payday lending through “safe harbor” legislation that allows for higher interest rate caps or other relatively favorable conditions for these types of financial product offerings. However, there are still significant differences among these states regarding where the limits are set on rates and fees, with several states offering loopholes that will allow you much more favorable terms as a payday lender as long as your business is structured as a certain type of organization according the laws of your particular jurisdiction. After doing some online research and comparing the different rules, I have compiled the following list of the 10 best states to set up your loan sharking business according to the highest interest rate limits and the least amount of hassle.
1. South Dakota: One of six states that do not impose any sort of cap on interest or fees, South Dakota is practically a loan sharking paradise for entities that are either located in the state or can appoint a registered agent with a local address to process the paperwork there. Payday loans are permitted under the small loan act and licensing laws with a maximum limit of $500 for a single loan. Much to the delight of the aspiring lender, there is no limit on either the term length of the loan or the number of concurrently outstanding loans that a borrower may have at any one time. Moreover, up to four “rollovers” are permitted, meaning that a borrower can renew the loan for additional terms by paying only the finance charge. This allows the lender to collect interest for a longer period of time without having to issue a new loan as long as the borrower does not repay in full after the first term expires. The state also has a convenient website for money lenders at dlr.sd.gov which links to the relevant laws and requirements to become legally licensed and even includes an application in .pdf format that you can browse and complete at your leisure.
2. Utah: Another state that conveniently lacks an interest rate cap, Utah’s regulations do not specify any maximum loan amount but do limit loan terms to a maximum of 12 weeks, or approximately 3 months. This 12 week limit also applies to rollovers in the sense that although the number of loan renewals is not limited, a single loan cannot be extended beyond 12 weeks from the date of the original loan approval.
Payday lenders are regulated as “deferred deposit loan lenders” under Chapter 23, which is known as the Check Cashing and Deferred Deposit Lending Registration Act. In addition to money lenders, this act also applies to check cashers and anyone who cashes checks for a fee. Details about these rules, including access to the application form for registering as a deferred deposit lender, is located at dfi.utah.gov.
3. Idaho: With a maximum loan amount of $1000 and no interest or fee caps, Idaho is another friendly state for payday lenders. Up to three loan renewals are permitted, with no limit on the number of outstanding loans per borrower. However, the aggregate amount of outstanding loans held simultaneously by a single debtor cannot exceed $1000. There is also a collection limit of $20 for non-sufficient funds fees plus 12% interest per year on unpaid loan amounts in the event of borrower default.
Regulation of payday lending in Idaho falls under the Idaho Credit Code, which applies to consumer credit services, and specifies that licensees are not required to maintain a physical location in the state but must pay an application fee of $350. Information about licensing and forms can be accessed at finance.idaho.gov.
4. Nevada: Situated just to the east of the more heavily regulated state of California, Nevada has long been a favorite place for businesses to incorporate, and it turns out be a fairly friendly place for payday lending operations as well. There is no formal cap on initial interest rates or fees, although there is a clause in the relevant legal codes that limits interest that can be collected after a borrower defaults to no more than 10 percent above the prime rate of the largest bank in the state. Interestingly, the maximum loan amount is not fixed like it is in most states but is instead stated as 25 percent of expected gross monthly income. The length of a single payday loan can run as much as 60 days, and this limit also applies to extensions and renewals. Collection fees are technically limited by law but can still add up to a considerable amount when one considers what is allowed. This list includes: $25 for dishonored checks, up to two fees for insufficient funds, one closed account fee, court costs, “reasonable” attorney’s fees, and the curiously vague “service of process costs”.
The Nevada payday loan regulators can be found at the Division of Financial Institutions, with the Web address residing at fid.state.nv.us. The relevant application forms are listed under “Check Cashing – Deferred Deposit Services” and cover the areas of check cashing, deferred deposits, title loans, and high interest loans.
5. Delaware: Another favorite state for business incorporations, Delaware’s rules for payday lending are fairly similar to those of South Dakota; there are no caps on interest or fees and four rollovers (loan renewals) are permitted. However, the state does have a maximum loan term of 60 days and individual borrowers cannot have more than $1000 of outstanding loans extant at the same time.
The regulator website for Delaware at banking.delaware.gov is refreshingly simple; look under Services – Apply for a License – Licensed Lenders and you can find the application form to become a licensed loan shark in Delaware. Note that there is a $250 “investigation fee” per location, and for people making “short term consumer loans”, which covers things like payday lending, there is an additional surcharge of $1500 per location applicable upon approval. It seems that loan sharks are not the only ones who are “predatory” when it comes to taking a bite out of our wallets!
6. Wisconsin: As the sixth and last state (so far) to keep lenders free of those annoying usury caps on short term loans, Wisconsin provides relatively fertile ground for payday lending services. There are a few regulatory nuances that make this state a little different from the ones we have covered so far, however. For example, although one loan renewal is permitted, there is a 24 hour “cooling off” period required after paying such a renewed loan before a borrower is allowed to take out another loan. There are also fairly strict limits on collections; only one non-sufficient funds fee of $15 is allowed, and criminal actions for collecting debts are prohibited under Wisconsin’s “worthless check” law. Maximum loan terms are capped at 90 days with the highest amount allowed equal to the lesser of $1,500 (including fees) or 35% of expected gross monthly income. Finally, if a customer defaults on a payday loan, he/she is allowed the opportunity of repaying the loan amount in four equal installments over a period of 12 months at no additional cost.
The Wisconsin Department of Financial Institutions regulator’s website at wdfi.org lists payday lenders under the Licensed Financial Services subheading. Links to recent changes in the lending laws can be found here, as well as lists of current licensees for various types of entities engaged in the business of selling financial services.
7. Missouri: Although this state’s laws do set a limit on allowable finance charges for short term loans, this $75 maximum results in the highest annual interest rate by far at a whopping 1,980% APR for a 14-day loan of $100. A relatively generous six rollovers are also permitted, although borrowers must reduce the principal amount of their original loans by 5% or more before they are allowed to roll over the loan again. Loan terms are limited to a minimum of 14 days and a maximum of 31 days, with the maximum amount being set at $500. However, it should be noted that Missouri laws prohibit lenders from collecting more than 75 percent of the original loan amount as interest or fees over the life of any single loan, including any renewals. This clause would tend to mitigate the surprisingly high APR allowed on 14 day loans, although presumably it is possible for lenders to get around this restriction by enticing borrowers to initiate separate new loans when the old terms expire instead of simply rolling over the original loan multiple times.
Information about Missouri laws and regulations pertaining to various consumer finance companies (including payday lenders) can be found at the site for the Missouri Division of Finance at finance.mo.gov. Searches for current licensees may be performed and consumer complaints filed there.
8. Virginia: The laws regulating consumer loans in Virginia are rather complex, but it is still possible for lenders to earn a nice profit if we know how to work the system. To begin with, the maximum finance charges include 36% annual interest plus a $5 verification fee plus 20% of the loan amount, which adds up to a maximum allowable total of $26.38 for a 14-day loan of $100. This works out to an annualized rate of 687.76%, the second highest for states that impose caps on finance charges. However, rollovers (refinancing, renewing, or extending of loans) are not allowed, and borrowers are prohibited from having more than one outstanding loan on the books from any lender. In case of defaults, repayment plans are allowed once per year, and “cooling off” periods of 1 day after payment, 45 days after the fifth loan, and 90 days after the end of a payment plan are applicable.
Until very recently (October 2011) there was a nice little loophole in the Virginia lending laws that allowed unlimited interest rates for short term loans as long as they were structured as car title loans, with the borrower’s vehicle being used as collateral. The recent legislation has now put limits on this veritable loan shark feeding frenzy, but significant profits are still allowed. Specifically, lenders can now charge 22 percent monthly interest on the portion of the loan under $700, 18 percent on the amount between $700 and $1,400, and 15 percent for sums over $1,400. Such loans must also be repaid within one year. For a theoretical $1,500 car title loan, this would translate to a maximum monthly repayment of $420 and a total repayment amount of $5,040, which represents a profit of over three times the original loan amount. This is definitely a much better return that I am getting on my savings account!
9. Mississippi: This southern state allows the third highest (not counting the six that do not have caps) APR for payday loans at 572 percent. Maximum finance charges are assessed as 18 percent of the check, with relatively small limits of $400 on the loan amount and 30 days for the loan term. No rollovers are permitted, but there are also no limits on the number of loans that borrowers may have outstanding, nor are there any “cooling off” periods to worry about. This opens up the possibility of making money from “payday loan addicts” who rather foolishly use their loan funds for things like shopping mall excursions, then take out additional payday loans to pay off the original loan. This sets up a cycle where the borrower is continually paying finance charges on the loans in addition to normal living expenses, which sometimes results in chronic monthly deficits. This is why it is important as a borrower to make sure that you can repay any short term loans such as this out of your realistically expected revenues, and do not use the loan funds for frivolous expenses that you just as easily cover by waiting for a few weeks and using money that is left over after the end of your normal paycheck cycle.
10. Texas: Although there is a usury cap for consumer loans, Texas is an interesting case where a loophole exists which allows lenders of both payday and car title loans to circumvent this cap and collect much higher fees than would be possible otherwise. Officially the law allows a $10 maximum finance charge plus 48 percent annual interest for short term loans, yielding an APR of “only” 309 percent on a 14-day loan of $100.
However, if one is technically not a lender but is instead structured as a Credit Services Organization (CSO), it is possible to charge unlimited fees for the service of brokering the loan and acting as the intermediary between the borrower and the official lender. Thus for a typical $300 payday loan with a term of two weeks, the actual interest paid to the lender might be a little over a dollar but the fee paid to the CSO could be $60 or more, which means that you would end up owing about $361 at the end of the two weeks. On average, such arrangements can result in annual interest rates of 500 percent or more, much to the chagrin of consumer advocates who are accustomed to recommending Credit Services Organizations to people who need to repair bad credit or consolidate their debts.
Overall, the payday lending industry is still a tricky beast. For borrowers, it’s easy to get caught in the debt trap of “too much month left at the end of the money” but it can be risky for lenders too, who must contend with changing regulations, high licensing fees, borrower defaults, competition from other lenders, and a mostly unsympathetic public. However, if you really want to take a shot at starting a legal loan sharking business, the 10 states listed above (at least for now) should give you a relatively good chance of earning a much better return on your savings than the traditional financial institutions are willing to provide for us.