Payday Loan in Maryland: Are They Legal and How Do They Work?

Payday loans, by definition, are short-term, small-dollar and high-cost loans, most notably characterized by triple-digit annual percentage rates (APRs) of almost 400%. They are, for better or worse, a well-known source of financing for bad-credit borrowers who need to bridge short-term income gaps.

Maryland residents, however, should familiarize themselves with other sources of emergency cash. The Old Line State is one of 21 states with consumer protection laws that effectively ban small-dollar, high-interest credit. Fortunately, there are solid alternatives to payday loans, no matter where you live.

MoneyLion offers a service to help you find personal loan offers. Based on the information you provide, you can get matched with offers for up to $100,000 from our top providers. You can compare rates, terms, and fees from different lenders and choose the best offer for you.

Are payday loans legal in Maryland?

While not banned outright, payday loans are illegal in Maryland due to laws that prohibit exorbitant interest rates on loans of up to $25,000. Under the Maryland Consumer Loan Law (MCLL):

• Loans of $1,000 or less are subject to a monthly interest rate cap of 2.75% and an annual interest rate cap of 33%. 

• Loans greater than $1,000 but less than $6,000 are subject to a monthly interest rate cap of 2% and an annual interest rate cap of 24%. 

• Loans greater than $6,000 are also subject to a monthly interest rate cap of 2% and an annual interest rate cap of 24%, though there are exceptions. For instance, interest rate caps differ for loans involving real estate. 

Maryland law also requires its lenders to hold a license with the Commissioner of Financial Regulation. You can check if a lender is licensed through the Nationwide Multistate Licensing System (NMLS). 

If a Maryland lender, licensed or otherwise, offers small-dollar loans at higher rates, they may be doing so illegally and could face serious criminal and civil penalties, including borrower restitution, a fine of up to $1,000 and up to a year in prison.   

The risks and dangers of payday loans

Maryland’s lending laws are meant to protect its borrowers from the risks associated with traditional payday loans. These risks include:

• No traditional credit check: Payday lenders rarely verify an applicant’s ability to repay, and, if they do, their standards are quite lax, putting borrowers at high risk of default.

• High fees and interest: Payday lenders typically charge between $10 to $30 for every $100 you’re borrowing, a high price to pay when you’re already cash-strapped.

• Tight repayment terms: Most payday loans are due within two to four weeks, giving borrowers little time to amass enough funds to pay off the debt.

• Automatic withdrawals: Payday lenders often require authorization to automatically debit funds from a borrower’s bank account on the loan’s due date, regardless of the funds’ availability, leaving them susceptible to bank fees and account closures. 

• Debt spirals: To avoid default, payday borrowers can usually rollover or renew their loan, albeit for a fee. This move increases their total borrowing costs and can lead to a hard-to-escape debt cycle.  

Borrowers who ultimately default on a loan could face debt collections, lawsuits, wage or bank account garnishments and subsequent damage to their credit score. 

How to avoid the payday loan trap

These steps could help you avoid payday loans, long-term debt traps or other costly forms of financing: 

• Know your rights. In Maryland, by law, lenders can’t charge more than a 33% APR on loans of up to $1,000 and loans between $1,000 and $6,000 are capped at 24% APRs . If you’re offered higher terms, the loan is likely illegal. You can report the violation by submitting a complaint to Maryland’s Office of Financial Regulation. 

• Establish and maintain good financial health. A good credit score and strong overall financial profile generally help you qualify for more affordable financing. 

• Pursue financial counseling. If you’re unsure of how to improve your finances, the CASH Campaign of Maryland offers free financial coaching around budgeting, eliminating debt, building credit and more, while the state’s Labor Department can help you connect with reputable and accredited financial and credit counselors.   

• Seek legal assistance if you’re facing a civil suit for debt or other financial issues. The Maryland Court Help Center offers free assistance to residents without a lawyer, while Maryland Legal Aid provides a range of free services and referrals to qualified individuals. 

When a payday loan might be the only option

Payday loans might be your only option if you live in a state that permits them, like Delaware or Oregon. However, it’s still best to treat them as a last resort — and only in financial emergencies. Examples of financial emergencies include:

• You need to pay for car repairs or gas to retain your job.

• You need to pay for urgent medical care. 

• You must pay the rent or face immediate eviction.

• You need money to relocate from an unsafe environment.

• Your bank account is unexpectedly frozen.

If you must take out a high-cost loan, mitigate the risks by patronizing a reputable licensed lender that offers hardship plans, borrowing only as much as you need and drafting a strict budget for the loan’s term to ensure you can repay. 

Safer alternatives to payday loans

You can also avoid pricey financing by familiarizing yourself with these payday loan alternatives. 

Credit cards

Credit cards generally afford you at least 21 days — known as a “grace period” — to pay off purchases without racking up interest. They also carry lower APRs than payday loans, usually ranging from 19% to 25%. 

Earned wage access

Earned wage access (EWA) products let you access wages you’ve already earned in between paychecks, usually for no interest or low fees. Instacash, an EWA product from MoneyLion, allows access to up to $500 in wages fee-free within 1 to 5 business days. 

Under Maryland’s lending laws, EWA products are considered loans and subject to licensing laws and other restrictions. For instance, fees are capped at $5 for advances of $75 or less and $7.50 for advances of $75 or higher. 

Personal loans (banks or credit unions)

Traditional unsecured personal loans generally have APRs between 8% and 36%. While you usually need good credit to qualify, especially for the best terms, local banks and credit unions are sometimes more open to approving borrowers, particularly if you have long-standing relationships with them.

Bank of Ocean City, Woodsboro Bank and Farmers Bank of Willard are community financial institutions in Maryland that advertise personal loans on their website, as do MECU and SECU credit unions. 

Payday alternative loans (PALs)

Many credit unions offer payday alternative loans (PALs) as part of a broader initiative led by the National Credit Union Administration (NCUA). These small-dollar loans generally offer APRs capped at 28% and repayment terms of up to 12 months, though you’ll likely incur an up to $20 application fee.  

Credit-builder loans

A credit-builder loan won’t cover a short-term funding gap, but it can help you build credit so you don’t have to turn to pricey financing if an emergency arises at a later time.

How credit-builder loans work: You “borrow” a small amount from the bank, which holds these funds in an interest-earning account. After you make a set number of installment payments, you receive the funds, plus some of the interest. The bank reports your payments to the credit bureaus, helping you build a better credit score. 

State-specific assistance programs

Maryland offers the following programs to residents facing financial hardship:

• Emergency Assistance to Families with Children (EAFC) provides cash support to eligible families who need emergency rent, utility or other essential assistance. 

• Temporary Cash Assistance (TCA) subsidizes qualified individuals with dependent children while they seek full-time employment.

• Energy Assistance helps residents struggling to cover heating or utility bills. 

• Burial Assistance provides some cash support to families who can’t afford burial costs for deceased participants of other public assistance programs.

You can dial 211 or visit the state’s 211 website to learn more about these and other statewide benefits. 

Borrowing from family and friends

Borrowing money from a loved one could prove preferable to a high-cost loan, particularly if that loved one agrees to charge no fees or interest. To ensure the relationship stays intact, draft a formal loan agreement that specifies the amount you’re borrowing and the repayment schedule.

Side hustles

A side hustle can help you muscle through a cash shortage and prevent one due to an unexpected loss of your primary income. 

Legal side hustles in Maryland include driving for rideshare or food delivery services, tutoring online on websites like Chegg or Wyzant and pet-sitting through platforms like Rover or Wag!.   

Conclusion

Payday loans are effectively banned in Maryland as state laws cap APRs on small-dollar loans well below what traditional payday lenders would charge. These laws are meant to protect you from high borrowing costs, debt traps and other risks associated with high-cost, small-dollar loans. 

Fortunately, you still have options when facing a cash shortfall, including credit cards, credit union loans and state-sponsored support programs. You could also consider applying online for a personal loan for borrowers with bad credit. 

FAQs

Does Maryland offer payday loans?

Maryland does not permit payday loans because the state restricts small-dollar lenders to stringent interest caps, including a 33% maximum APR on loans of $1,000 or less. Payday loans are characterized by high triple-digit APRs. 

Are cash advances allowed in Maryland?

Traditional credit card cash advances, where you withdraw cash from an ATM or bank against your credit limit, are allowed in Maryland as they’re not subject to the same laws as payday loans. They are quite costly, however, incurring immediate, inflated interest and a 3% to 5% fee, so it’s a good idea to consider all options before taking one. Cash advances through apps are also permitted in the state, though subject to new restrictions. 

How can I borrow $500 immediately?

Some banks, credit unions or online lenders offer small-dollar loans with funding times of 24 hours to 3 business days. Cash advance or EWA products could also serve as a source of fast cash. Instacash, an EWA product from MoneyLion, can you access a portion of your paycheck early.  

Sources

• Consumerfinance.gov - What is a payday loan?

• Govt.westlaw.com - Maryland Consumer Loans—Credit Provisions