An Internet payday loan company agreed to pay $180,000 and not supply any Wisconsin resident with a payday loan for the next five years as a result of a class action settlement reached Friday with the state of Wisconsin.

California-based Arrowhead Investments LLC also agreed to forgive all debts of Wisconsin residents who took out a loan from the company. Those who paid more than the original loan amount will receive a cash payment.

Payday loans are short-term, unsecured loans for small amounts that borrowers promise to repay out of their next paycheck. The cost of borrowing, or the annual percentage rate, is usually very high — meaning that often borrowers spend most of their money repaying APRs without repaying the principle loan itself. Individuals who seek payday loans generally have no lower-cost borrowing alternative.

Approximately 1,300 Wisconsin residents received a loan from the company between 2001 and 2007, according to a statement from the Consumer Law Litigation Clinic at the University of Wisconsin. The clinic filed the lawsuit and was later joined by the Wisconsin Department of Justice.

It was alleged in the complaint that Arrowhead’s practices violated provisions of the Consumer Protection Act, particularly by allowing loan fees to repeatedly roll over.

Arrowhead denied all allegations and has not admitted any liability in this matter. The court has not ruled on the merits of any of the claims asserted, according to the statement.

“The court found that Arrowhead had enough contact with Wisconsin consumers and was doing substantial business here, so that the court could have jurisdiction over it, even though it has no ‘physical presence’ in the state,” said Sarah Orr, clinical law instructor at the Consumer Law Litigation Clinic. “That should be a strong message to other internet lenders.”

Payday loans are on the minds of Wisconsin lawmakers as well, as a bill that would regulate payday loans in Wisconsin is scheduled for a vote in Assembly Tuesday. The bill, introduced as the Responsible Lending Act, would place a cap on payday loans at $600, allow borrowers to take out only one payday loan at a time and ban auto title loans.

“People do make the argument that receiving bad credit is better than receiving no credit,” Rep. Kelda Helen Roys, D-Madison, said. “We have virtually no regulation of payday lenders, and as a result, consumers in Wisconsin are being saddled with abuses, fees, interests and general practices that should be illegal.”

The Wisconsin ruling also comes on the heels of a series of other state court decisions against online payday lenders.

In July, the Pennsylvania Commonwealth Court ruled that an online payday lending company is no longer authorized to do business in the state. In March, the state of West Virginia sued 12 online payday-lending companies and their collection agencies for failure to adhere to the state cap of APRs on loans.

Arrowhead Investments could not be reached for comment.