In short, it depends on the type of loan (personal vs. business) and the loan terms. Personal loans are typically unsecured, meaning you do not have to put up any collateral and there is no down payment like home and auto loans require - it’s up to your creditworthiness to secure the loan. Not all internet loans are improper, but all personal loans made on the internet that violate the 12% APR rule are void and unenforceable, as are internet payday loans and many open-end internet loans.
12% Annual Percentage Rate (APR) Rule
Unless statutorily exempt under Virginia Code § 6.2-303, no contract shall be made for the payment of interest on a loan at a rate that exceeds 12% a year. One of the exemptions is for licensed Virginia consumer finance companies. (You can find the other exemptions listed in section B of Virginia code § 6.2-303.) A consumer finance company is defined as “a person engaged in the business of making loans to individuals for personal, family, household, or other nonbusiness purposes.” Virginia Code § 6.2-1500. These companies may charge more than 12% interest but there are no internet lenders licensed as a consumer finance company in Virginia, so any companies offering personal loans online are acting improperly.
Virginia Code § 6.2-1541 further regulates that if a lender makes a non-business loan without a Consumer Finance License and makes a loan for more than 12% APR, the contract is void and the lender is not entitled to collect any principal, interest or charges whatsoever on the loan (and the borrower is entitled to any principal or interest already paid on the loan). In interpreting the Virginia Code, the court in Virginia v. Cash N A Flash determined in 2010, that because the lender, Cash N A Flash, had not obtained a Consumer Finance License and because it charged more than a 12% APR, that a loan it provided was null and void and the court also granted a repayment of the interest and principal back to the borrower.
Internet Payday Loans, Installment Loans, and Open-End Loans
Internet Payday Loans
A payday loan, defined under Virginia Code § 6.2-1800, is a small, short-maturity loan based on the security of some income payable to you (not based on income tax refunds). These loans are permissible, but no internet lenders have a payday loan license, so you cannot get a payday loan online. It is a Class 2 misdemeanor to make such a loan without a license.
Installment loans are loans where the loan repayment is over a set period of time (weekly or monthly payments, for example). Internet installment loans don’t meet any of the statutory exceptions listed in subsection B of Virginia code § 6.2-303, so they are null and void if they charge more than 12% APR.
Open-end loans are those that do not have a set date to finish paying off the loan (similar to a credit card: as you pay it back, you can take out more money on the “credit line”). Under Virginia Code § 6.2-312, you have at least 25 days to repay the loan in full without incurring any charges or fees. There are some internet lenders pretending to offer open-end loans but they either do not meet the definition of an open-end loan under Virginia Code § 6.2-300, which is defined as “consumer credit extended by a creditor under a plan in which: (i) the creditor reasonably contemplates repeated transactions; (ii) the creditor may impose a finance charge from time to time on an outstanding unpaid balance; and (iii) the amount of credit that may be extended to the consumer during the term of the plan, up to any limit set by the creditor, is generally made available to the extent that any outstanding balance is repaid,” or they do not have the required 25-day grace period required by Virginia Code § 6.2-312. Finally, as noted above, if the interest charged exceeds 12% APR, the loan is null and void.
Different Laws in Different States?
Sometimes, a loan contract will contain a clause that applies a different state’s law to the loan. Even if you have agreed to this provision in the contract, if the lender does not have a Virginia license to make consumer loans with an interest rate greater than 12% APR, then the loan is void and the contract cannot be enforced.
Internet loans are easily available and well-marketed but there are only a few safeguards in place in Virginia to protect consumers. All loans made to Virginia residents over the internet for more than 12% APR, are unenforceable loans. All internet payday loans are illegal. And any open-end loan (that is not statutorily-exempt), must provide borrowers a 25-day grace period without any fees or charges. Make sure you are aware of these protections when entering into an internet loan. If you think you entered into an invalid loan and need assistance, please contact us.