Are Payday Loans Safe For Consumers?

Payday loan racketeering may have become more difficult for lenders, but it is still dangerous for consumers.

Last week, the Consumer Financial Protection Bureau announcement a new set of protections for borrowers who use these services. Financial experts and consumer advocates have strongly criticized the payday lending industry for its predatory practices that trap borrowers in debt cycles. According to the CFPB, the new rules aim to break this pattern.

Payday loans are typically for relatively small amounts, typically several hundred dollars at a time, and are due on the borrower’s next paycheck. Essentially, they act like a third party advance; however, at interest rates that eclipse almost all other forms of lending. A typical payday loan can load an APR of 300 to 400%.

Cash-strapped consumers often find it difficult to make these payments and, as a result, have to take out a new loan at the end of the month to cover both basic necessities and loan servicing. According to to research from Pew Charitable Trusts, although the average borrower withdraws $ 375, they can only afford to pay $ 50. So they take out one new loan, and another after that to avoid defaulting on debt or bills elsewhere, so much so that the same research indicated that over 80% of cases, one payday borrower takes on another. within 14 days.

About a quarter of all loans are renewed in this manner at least nine times, with the borrower ultimately paying more interest than he originally borrowed.

It is for this reason that industry experts have often criticized the payday lending industry as targeting vulnerable consumers. People with more money and therefore generally better credit have access to better regulated products such as credit cards and short-term personal loans.

The new CFPB rules aim to ensure that borrowers can afford to repay their debt without crippling their household budgets. Among other things, the agency will institute three main consumer protections:

A full payment test

This rule, according to at the Bureau’s announcement, will require lenders “to determine whether the borrower can afford loan repayments while meeting basic living expenses and major financial obligations.” It will apply to any short-term loan that requires full payment, but lenders who offer more structured payment options may skip this test.

Capital repayment options

To weaken the debt cycle triggered by consecutive rounds of loans, the CFPB said, this rule will allow borrowers to bypass certain consumer protections if the lender offers extensions and payment plans for borrowers who need more. of time.

Debit attempt limits

Lenders may only directly debit a borrower’s checking or prepaid account with written notice, and may only do so twice without additional written permission from the borrower.

In total, these protections aim to help low-income borrowers to better manage their debt, the CFPB noted in his ad. Many of the new rules target the original nature of payday loans, forcing and incentivizing lenders to offer structured payment plans that borrowers might find easier to repay.

However, not everyone is happy with this.

Speaking with Consumer Reports, Dennis Shaul, CEO of the Community Financial Services Association of America, argued that these new rules will make it much more difficult for low-income people to access money.

“Millions of American consumers are using small loans to manage budget deficits or unexpected expenses,” he said.

And the demand is there. According to According to research from Pew Charitable Trusts, almost 5% of adults take out a payday loan in any given year. The demand is certainly there, and supporters argue that the industry is filling a need by allowing people to cover for emergencies and unforeseen expenses.

Yet researchers argue that these claims are misleading. Experts to say that the overwhelming majority of payday loan funds are used for daily expenses such as groceries and bills and that about 75% of the industry’s profits come from borrowers who have to take out more than ten loans per year.

These borrowers may now have more options available than a one-year debt trap.

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About Judith J. George

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