Payday loans target those with no money

Maybe it’s time to admit dad knew better.

After talking to both sides in the battle over payday loan rules, I can’t help but return to my father’s regulatory regime. Two words dictated his approach to managing his finances: “Pay Cash”.

No one, not even the Consumer Financial Protection Bureau, will ever put such a simple rule in place. It would never fly as a national warrant. But it could definitely help you do the math when deciding whether you need to stretch an old TV, a bunch of car, or some not-so-good tires a few more months. Do you then reconsider how much you would borrow for a longer-term loan? Reevaluate whether you would attend a private college or cut costs by going to a community college for a year or two and then heading to a state university?

Yes, it’s old school. And cash seems too simplistic, especially when people who took payday loans say they felt so stressed they had no other options. But as a kid, I saw my dad bring a wad of cash to a store when he bought new furniture and appliances. I’ve also seen him fix a ton of stuff — including watching him fix a tire — to stretch his dollar.

And frankly, paying only with cash is a way for many consumers to get out of credit card fiascos. If you don’t have cash on hand or know you need cash for a big bill, you just don’t buy certain things. Or you shop around until you find something cheaper.

The reality is that no one should ever choose to borrow money from a loan shark, even if the shark is swimming around under the guise of a trade association or financial institution. But it’s estimated that more than 12 million people take out payday loans a year, loans of $300 or $500 that can have an annual percentage rate of 391%. About 16,000 lenders handle storefront outfits in malls and other places, as well as online.

Perry Green, 30, said he ended up spending $1,000 in fees and interest after taking out a $300 payday loan from a Detroit storefront. Green, who now lives in Chicago and spoke last week at a press conference led by activist group Michigan United, said his first loan turned into a three-year debt trap years after continuing to take out one loan after another to cover bills and expenses. He took out the loan to cover his rent because he thought it was his only option.

Payday loan predatory practices payback period

Dennis Shaul, chief executive of the Community Financial Services Association of America, the trade group for payday lenders, strongly criticized the proposed restrictions on payday loans released last week by the Consumer Financial Protection Bureau. He claims it would put people out of business and cut off credit to the most vulnerable consumers who don’t have many credit options.

Nothing is easier, he argues, than offering new consumer protections by saying most people can’t get credit anymore, which he claims is what the CFPB is essentially trying to do.

Of course, Shaul also argues that consumers could ultimately find riskier credit — if payday lenders are forced to close by new federal rules — by turning even more frequently to illegal offshore lenders and other sharks. more dangerous.

The American Bankers Association, which represents large and small banks, also criticized the CFPB’s proposed rules.

The CFPB’s proposal, along with previous regulatory measures, would make it “challenging for banks to meet the needs of the estimated 50 million consumers who access a variety of low-cost bank and non-bank lending products each year,” it said. ABA in its statement.

While the CFPB has frequently expressed interest in expanding the role of banks in the small loan market, the ABA said the proposal does not do so in a meaningful way and will severely limit the availability of small loan amount.

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Some might have liked to see the CFPB simply crack down on the triple-digit rates and exorbitant fees charged by short-term, low-cost lenders. But federal regulators don’t have the power to set interest rates. Individual states can decide if they want to limit fees and rates on payday loans and other low-value loan products.

“States can and should maintain strong rate caps and adopt new ones as the first line of defense against predatory lending,” said Tom Feltner, director of financial services for the Consumer Federation of America.

The Pew Charitable Trusts, which has conducted research on small loans, has a online interactive map outlining what states are doing in the payday lending regulatory space.

Michigan, for example, sees 5% of the state’s population using payday loans. According to Pew’s research, Michigan is classified as a permissive state, which means the state has interest rates that allow payday loans to exist in the state. Pew notes that the annual percentage rate typically exceeds 300% for Michigan borrowers.

“CFPB’s real power to drive down prices is to bring lower-cost providers, like banks and credit unions, into the market,” said Alex Horowitz, senior manager of the Small Dollars Lending Project at Pew. .

Pew researchers favored the inclusion of a proposal requiring longer-term loan repayments to be no more than 5% of a borrower’s income. Pew said the 5% payment option, which was in the CFPB’s 2015 proposal, would provide the product security standards banks need to offer small-dollar loans at prices six times lower than those payday lenders.

Considering all the powerhouses with financial interests and opinions on small dollar loans, we’ll likely hear more as the plan unfolds. open to public comment until September 14. Consumer rights advocates, such as Michigan United, are urging consumers to take complaints about payday loans to the CFPB.

Still, don’t bet on anyone forcing cash-only purchases — or for that matter, completing the elimination of debt pitfalls. It is not so simple. Where is it?

Contact Susan Tompor: [email protected] or 313-222-8876. Follow her on Twitter @Tompor.

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