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

If you live in Kentucky, face a stressful income gap and have no access to traditional credit, you might consider turning to a payday lender for “quick” emergency cash. 

But that move could cost you. According to The Pew Charitable Trust, Kentucky payday loans carry an average annual percentage rate (APR) of 464%, with the average cost of borrowing $500 for four months totaling $712.

Given the high price, particularly for already cash-strapped borrowers, it’s helpful to understand the Bluegrass State’s payday lending laws and short-term credit alternatives. 

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Are payday loans legal in Kentucky?

Payday loans, also known as deferred deposit transactions, are legal in Kentucky. However, in June 2019, the state banned new deferred deposit lenders, effectively capping the market to existing licensed providers.

Under state law, these lenders are subject to the following restrictions:

• They can’t charge more than $15 per $100 of the advanced amount.

• They must limit borrowers to no more than two active payday loans at a time and ensure total concurrent loan balances don’t exceed $500.

• They must abide by a minimum loan term of 14 days and a maximum term of 60 days.

• They can’t charge a fee to rollover, renew, or consolidate payday loans. 

Kentucky requires all payday lenders to hold a license with its Department of Financial Institutions (DFI). If a lender is offering deferred deposit transactions without a license, it’s doing so illegally. 

You can verify a lender’s credentials through the DFI’s database.

How payday loans work in Kentucky

Kentucky payday lending laws are written under the assumption that a borrower will secure their loan with a post-dated check, money order or another physical paper payment method. 

As a result, getting a payday loan in Kentucky typically involves these steps:

• You apply in a store or start your application online. Most payday lenders require applicants to be 18 years old, reside in the state and present government-issued identification. Some require active checking accounts.   

• The lender verifies your ability to repay. While they typically skip a credit check, most require some proof of income and all must check the state database to ensure you won’t exceed Kentucky’s borrowing limits. Lenders might pay up to $3 to check the database, and they can pass this cost along to you. 

• They offer you loan terms. Federal and state law require lenders to provide a written loan agreement that outlines the APR, total borrowing costs, due date and more. 

• You receive your loan funds, usually in cash or via direct deposit into your checking account.  

• The lender collects payment by depositing the check or other paper payment method on the loan’s due date. You could incur bank fees if this check bounces.

While Kentucky law doesn’t explicitly ban electronic repayments, such as automatic ACH withdrawals, the state has repeatedly clarified that borrowers must present a physical payment method to payday lenders.

Notably, its law prohibits lenders from requiring you to authorize electronic repayments. 

The risks and dangers of payday loans

While Kentucky regulates its payday loans, they’re still quite costly. A $15 fee on a 14-day $100 loan amounts to a 391% APR, and the state allows licensed payday lenders to offer tight 14-day repayment windows to already cash-strapped borrowers. 

While Kentucky lenders can’t charge renewal fees, you can still rollover or take out a new loan on their due dates, provided you’re still within state borrowing limits. That leaves you vulnerable to entering a debt cycle that’s long become synonymous with payday lending.  

The alternative — fully defaulting on the loan — could lead to debt collection efforts, civil suits, wage garnishments, credit score damage, bank account closures and more.   

How to avoid the payday loan trap

Fortunately, you can avoid payday loan traps by taking the following steps.

• Build and maintain good credit by opening a starter or secured account, making punctual loan payments, limiting hard inquiries and keeping debts low.

• Establish a strong relationship with your local bank or credit union, as they’re sometimes amendable to providing small-dollar credit to customers in good standing.

• Negotiate with service providers or creditors before taking out a payday loan to pay these bills. Many offer hardship programs to eligible customers.

When a payday loan might be the only option

Per the U.S. Census, nearly 16% of Kentucky residents are living in poverty, and other measures show that around 44% are financially constrained. 

If you’re among these demographics, your credit is poor and you’ve exhausted all other sources of funding, you might have to consider a payday loan. However, it's still important to limit their use. 

In Kentucky, financial emergencies could include forced relocation following natural disasters, funding car repairs or child care needed to retain work or utility shutoffs during a dangerous heat wave. 

If you must take out a payday loan, these steps could help you minimize damages and avoid long-term financial risks. 

• Ask your lender if they offer extended repayment plans (EPPs). These plans let you repay loans over several installments and longer timeframes. Unlike some states, Kentucky doesn’t require lenders to offer EPPs, but some might anyway. 

• Stop payment on the check. Kentucky law doesn’t explicitly prohibit payday lenders from making multiple attempts to deposit a check, so if your account is low on funds, this step might help you avoid costly bank fees.

• Seek assistance. Local government initiatives, such as the Louisville Financial Empowerment Center, offer free financial counseling, as do nationwide nonprofit credit counseling agencies. These agencies can also help you negotiate with creditors and establish a debt management plan, usually for a modest fee.  

Safer alternatives to payday loans

Credit cards

You could avoid accruing interest on emergency purchases for up to 21 days by leveraging a credit card’s grace period. And, if you are unable to repay in that timeframe, you might still pay less than you would with a payday loan. Credit card APRs average around 21%.  

Earned wage access

Some employers offer Earned Wage Access services, which let their employees tap accrued wages in between paychecks to address cash shortfalls. 

There are also standalone EWA products that don’t require a credit check and charge minimal fees. For example, Instacash, an EWA product from MoneyLion, allows access to up to $500 in wages within 1 to 5 business days, no interest or mandatory fees.

Personal loans (banks or credit unions)

Local banks and credit unions are often willing to extend traditional small-dollar credit to qualified customers. First Community Bank of the Heartland in Clinton, Kentucky, for instance, offers unsecured personal loans of $500 or more with repayment terms of 30 days or longer. 

Payday alternative loans (PALs)

KIT Federal Credit Union in Louisville, Kentucky, is one of many cooperatives that offer payday alternative loans (PALs). PALs are small-dollar, short-term credit, but they’re typically less expensive and less risky than their payday predecessor. 

KIT’s PALs, for instance, charge up to 28% APRs, plus a $20 application fee. They also let you pay up to $1,000 back over six months, rather than two to four weeks. 

Credit-builder loans

If you’re looking into a payday loan as a means to build credit, consider a credit-builder loan instead. These products, which function as a hybrid between a secured loan and a certificate of deposit (CD), will report use to the major credit bureaus. 

You can explore credit-builder loans with a MoneyLion Credit Builder Plus membership. 

State-specific assistance programs

Kentucky offers many state and community assistance programs to help residents weather financial hardship. These include:

• Kentucky Transitional Assistance Program (KTAP) provides financial and medical assistance to dependent children of eligible families for up to 60 months per lifetime. 

• Low-Income Home Energy Assistance Program (LIHEAP) helps eligible Kentucky residents pay utility bills, weatherize their homes, repair furnaces and address other energy-related emergencies.

• Kentucky Child Care Assistance Program (CCAP) helps eligible caregivers find and pay for child care while working or seeking employment.

You can learn more about these and other available local resources by calling 211 or visiting Kentucky’s 211 website. 

Borrowing from family and friends

A friend or family member could be willing to lend you money in case of emergency, ideally with no fees or interest. Having a clear, direct ask, a formal written agreement and methods for tracking payments could help ensure a smooth repayment term.   

Side hustles

A side hustle, such as working for a ridesharing app or a junk removal service, might generate enough income to cover a current or future cash shortage. Kentucky residents could also find temporary and same-day jobs listed on community forums or online platforms like Wonolo. 

Conclusion

Payday loans are legal in Kentucky, but you can only get one from a legacy lender who must follow fee caps, borrowing limits and other restrictions. While regulated, Blue Grass State payday loans remain expensive, often charging triple-digit APRs. To avoid them, build good credit, bolster emergency savings and familiarize yourself with payday loan alternatives, like PALs, EWA products and community bank personal loans. 

FAQs

What is the maximum loan amount I can borrow in Kentucky?

Kentucky’s payday lending laws limit borrowers to two payday loans at a time. They also specify that your total payday loan proceeds (effectively how much you’re borrowing) can’t exceed $500. 

What fees and interest rates can payday lenders charge in Kentucky?

Kentucky payday lenders can’t charge more than $15 for every $100 an applicant borrows. But, even with that restriction, payday loans in Kentucky are pricey. For instance, say you borrow $300 for 14 days and pay the maximum $45 fee. You’re effectively paying a 391% APR. In Kentucky, payday lenders can also pass along a database verification fee of up to $3 to customers. 

How long do payday loans last?

Kentucky imposes a minimum payday loan term of 14 days and a maximum of 60 days. Most payday loans are due 14 to 30 days after their origination date. 

Will a payday loan affect my credit score?

A payday loan is highly unlikely to help you build credit, as payday lenders don’t typically report to the major credit reporting agencies. A payday loan can indirectly damage your credit score if it leads to debt collection efforts, civil suits, liens, wage garnishments or other adverse actions.

Can I get a payday loan with bad credit?

Payday loans don’t require traditional credit checks, so you could get one with bad credit. However, payday loans are costly and risky. You might want to fully explore alternatives, including a personal loan for people with bad credit, before visiting a payday lender. 

What should I do if I can’t repay my payday loan on time?

If you can’t repay a payday loan as agreed, check to see if your lender offers an extended repayment plan, though they aren’t required under Kentucky law. You can also put a stop-payment order on the check to potentially minimize bank fees. 

Sources

• Pew.org - Payday Loans Cost 4 Times More in States With Few Consumer Protections

• Apps.legislature.ky.gov - Ban on issuance of deferred deposit service business licenses

• Apps.legislature.ky.gov - Deferred Deposit Licensee Procedures

• Fcbheartland.com - Personal Loan Website

• Kitfcu.org - Personal Loan Website

• Consumerfinance.gov - What is a payday loan?