How Payday Loans Work in California

What a payday loan is

A payday loan — also called a deferred deposit transaction in California — is a short-term loan where you give the lender a postdated check or authorize an electronic debit for the loan amount plus a fee. The lender gives you cash. On your next payday, the lender deposits the check or initiates the debit to collect.

In California, payday lenders must be licensed by the California Department of Financial Protection and Innovation (DFPI) under the CDDTL. A lender operating without a valid DFPI license is violating California law, and that fact can be raised as a defense in any collection action.

The legal limits on payday loans in California

California law sets strict limits on what a payday lender can do:

• The maximum loan amount is $300 gross — meaning the check you write cannot exceed $300. After the lender takes its fee, you receive no more than $255 in cash.
• The maximum fee is 15% of the face amount of the check. On a $300 check, the maximum fee is $45.
• The maximum loan term is 31 days.
• Rollovers are prohibited. A lender cannot extend or roll over a payday loan in California.
• A lender cannot make more than one payday loan to a borrower at a time.

What happens if you can’t pay

If you cannot repay your payday loan when it comes due, your check will be deposited and may bounce — triggering a returned check fee from your bank on top of the lender’s fee. The lender may then attempt to collect the debt directly or refer it to a collection agency or collection law firm.

California law does not allow a payday lender to criminally prosecute you for a bounced check on a payday loan if you provided the check in good faith. Threatening criminal prosecution for a returned payday loan check is a violation of both the FDCPA and the Rosenthal Act.

If a payday lender sues you

Payday lenders and the debt buyers who purchase defaulted payday loan accounts do file lawsuits in California. If you are served with a lawsuit, you have 30 days from the date of service to file a written response. If you do not respond, the lender can obtain a default judgment and use it to garnish your wages or levy your bank account.

Filing a response puts you in a position to raise defenses — including the statute of limitations, errors in the amount claimed, or FDCPA and Rosenthal Act violations as counterclaims if the lender used illegal collection tactics.

Under CCP § 337, the statute of limitations on a written contract in California is four years. Under Civil Code § 1788.52, a debt collector suing on consumer debt must plead and prove the claim is timely. If the debt is more than four years old, this may be a complete defense — but you must raise it.

Your rights under California and federal law

California payday loan borrowers are protected by multiple overlapping laws:

• The CDDTL (Financial Code § 23000 et seq.) — governs loan terms, fee limits, and lender licensing requirements.
• The FDCPA (15 U.S.C. § 1692 et seq.) — prohibits harassment, false statements, and unfair collection practices by third-party debt collectors.
• The Rosenthal Act (Civil Code § 1788 et seq.) — extends those same protections to original creditors collecting their own debts.
• The California Consumer Financial Protection Law (Financial Code § 90001 et seq.) — gives the DFPI broad authority to investigate, fine, and revoke the licenses of payday lenders who violate California law.

Could bankruptcy help?

Payday loan debt is unsecured consumer debt and is generally dischargeable in a Chapter 7 bankruptcy under 11 U.S.C. § 727. Filing bankruptcy triggers an automatic stay under 11 U.S.C. § 362 that immediately stops all collection activity — including any pending lawsuit — the moment the case is filed.

If payday loan debt is part of a larger financial problem, it may be worth a conversation with a bankruptcy attorney.

Frequently asked questions