Sara Routhier, Managing Editor and Outreach Director, has professional experience as an educator, SEO specialist, and content marketer. She has over five years of experience in the insurance industry. As a researcher, data nerd, writer, and editor she strives to curate educational, enlightening articles that provide you with the must-know facts and best-kept secrets within the overwhelming world o...

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Joel Ohman is the CEO of a private equity-backed digital media company. He is a CERTIFIED FINANCIAL PLANNER™, author, angel investor, and serial entrepreneur who loves creating new things, whether books or businesses. He has also previously served as the founder and resident CFP® of a national insurance agency, Real Time Health Quotes. He also has an MBA from the University of South Florida. ...

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Reviewed by Joel Ohman
Founder, CFP®

UPDATED: Mar 16, 2012

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The short answer is if a payday loan is illegal in your state, then you will likely only need to pay the principal. If any interest has already been paid towards the loan, then it might be possible to recover that lost money—but usually the time, effort, and expense are not worth the trouble. However, laws are different from state to state and individuals should check with their particular state’s commissioner on their particular case in order to be sure.

Even in states that allow for payday loans, if a lender is not properly registered then borrowers may be permitted to receive compensation for the interest they’ve paid on their short-term financing. If a payday loan is still outstanding when a borrower discovers their lender is unregistered, then the borrower may be entitled to just pay back the principal, and withhold any and all remaining interest payments. Again, this is a matter to be taken up with a person’s individual state commissioner.

Some states grant consumers even further protection than simply relieving them of interest payments. Utah, for example, now grants borrowers the right to cease all payments on a payday loan if a lender is operating illegally in the state. This brand new law, HB459, was just recently approved and enacted in Utah.

While most storefront payday lenders are registered in the state in which they reside, the real problem rests with online payday loan originators. Since the internet spans state and country borders, lenders (as well as scam artists) have proliferated across the web, sending their advertisements out to as many web surfers as they can reach. As a result, many online lenders cross legal boundaries and originate financing for people in states that they are not legally entitled to practice in.

Borrowers who are struggling with payday loans or who believe their lender to be acting outside of the bounds of the law may be wise to investigate a lender’s legal status. Interested consumers can browse their state-specific laws on the payday loan consumer information website.