Legal Definitions - small-loan act

A small-loan act is a state law designed to protect consumers by regulating the terms and conditions of small, short-term loans offered by financial institutions like banks and specialized finance companies.

These laws typically set a maximum allowable interest rate and may also dictate other aspects of the loan, such as fees, repayment schedules, and the maximum principal amount, to prevent predatory lending practices where borrowers might be charged excessively high rates or unfair terms for relatively small sums of money.

• Example 1: Emergency Car Repair Loan

  Imagine Sarah needs $500 to fix her car's transmission, an unexpected expense. She approaches a local finance company that offers quick, short-term loans. In her state, a small-loan act is in effect, which limits the annual interest rate that company can charge on a loan of that size to, for instance, 36%. This act prevents the finance company from charging her an exorbitant rate like 300% APR, ensuring she can access necessary funds without falling into a debt trap due to excessive interest.

• Example 2: Regulating Payday Lenders

  A state legislature passes a new small-loan act specifically to address concerns about payday lenders. This act might cap the fees a lender can charge for a two-week, $300 loan to a maximum of $15 per $100 borrowed, effectively setting an upper limit on the cost of such short-term credit. It could also mandate that borrowers be offered an extended payment plan if they cannot repay the loan on the original due date, providing additional consumer protection beyond just interest rates.

• Example 3: Medical Bill Assistance Loan

  Consider a situation where a person faces an unexpected medical bill of $750 that isn't fully covered by insurance. They might seek a short-term personal loan from a credit union or a small lending institution. A state's small-loan act would dictate the highest interest rate and any administrative fees that these lenders could legally charge for a loan of this size and duration. This prevents lenders from exploiting a vulnerable individual's urgent need for funds by imposing excessively high costs, ensuring that the loan remains a manageable solution rather than an additional financial burden.