Different states feature various laws that govern the lending industry. These laws exist to protect borrowers from lenders that charge excessively high interest rates or structure loans in ways that prey on the desperate or vulnerable. Rules imposed on creditors include interest rate caps, limits on loan amounts, and guidelines on acceptable methods for banks to recover delinquent debt. Some states disallow certain loan products altogether, such as title loans and payday loans.
Arizona features a two-tiered system for regulating lending institutions. One set of laws applies to all traditional loans, such as mortgages, car loans, bank loans and credit cards. The state has carved out a separate legal framework exclusively for short-term loans, including title loans and payday loans, theorizing that the restrictive annual interest rate caps placed on other loan products are not necessary for loans that tend to be paid back within 30 days or less.
Arizona Regulations for Traditional Lenders
Most finance companies that operate in Arizona fall under the umbrella of traditional lenders. As such, they are bound by a set of laws that limit the annual interest rate they can charge. This rate, as of 2016, stands at 36 percent.
In other words, an Arizona consumer who is taking out a loan to buy a house or car, or who is applying for a credit card or personal loan from the bank, is assured that, so long as his or her lender is in compliance with state law, the interest rate can never exceed 36 percent per year.
Therefore, a borrower receiving a $10,000 loan pays maximum interest charges of $3,600 in year one.
Arizona Regulations for Short-Term Lenders
Short-term lenders in Arizona offer loans that borrowers typically pay back much faster than mortgages, auto loans or long-term installment loans. These lending products, which include car title loans and payday loans, often have due dates that occur 30 days or less from the disbursement of funds.
Consequently, lenders in such niches would face difficulty turning a profit and remaining in business were they bound by a 36 percent annual interest rate cap, which works out to 3 percent per month. Arizona recognizes the unique circumstances under which these lenders operate and, as a result, has devised a modified set of laws for them to follow.
Short-term loans in Arizona feature monthly interest rate limits rather than annual caps. The interest rate limits on Arizona title loans are as follows:
17 percent per month on loan amounts under $500.
15 percent per month on loan amounts between $500 and $2,500.
13 percent per month on loan amounts between $2,500 and $5,000.
10 percent per month on loan amounts over $5,000.
This interest rate schedule provides lenders that specialize in small loan amounts room to make a profit while offering greater protection to consumers who borrow more significant sums.
Because each state's laws are unique, it is important to choose a lender that keeps up with local regulations and commits to operating within such parameters. Arizona is one of the more lenient states for short-term lenders, but its laws still offer a measure of protection to borrowers facing temporary financial difficulty.