New payday loan rules

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Who do low-income Americans turn to when faced with immediate bills and don’t have the money to pay them? Most turn to the payday loan industry, which offers short-term loans in exchange for high fees and interest rates. These loans are usually $500 or less and are called payday loans because the borrower is supposed to repay it upon receipt of his next paycheck.

According to the Consumer Financial Protection Bureau (CFPB), the payday loan industry is taking advantage of its vulnerable customer base, trapping too many consumers in a constant cycle of renewing loans they simply cannot repay.

The Community Financial Services Association of America (CFSA) lists an average fee of $15 for every $100 taken out in payday loans. This cost may not sound bad, but due to the short time frame involved, it equates to an annual percentage interest rate (APR) of almost 400%.

According to CFPB80% of payday loan borrowers pay within a month, but 25% end up re-borrowing more than eight times – in some cases, just rolling over the loan and increasing fees and/or interest.

CFPB recently announced its final rule to regulate the payday lending industry and bring it closer to a more traditional lending structure. Until now, the industry has been regulated by a patchwork of state laws that leave payday loan services virtually banned in some states and thriving in others.

The CFPB rule protects the personal loan consumer in two major aspects:

1. Assess Repayment Capacity – Payday loans are the choice of many low-income borrowers because they don’t require credit checks or other financial assessments. In exchange for this higher risk, payday loan operators charge significantly higher interest rates and fees. The rule would require payday lenders to assess repayment capacity by reviewing income, expenses and other financial obligations — essentially, by completing a credit report. You can check your credit score and read your credit report for free in minutes using Credit Manager by MoneyTips.

Lenders can make a single loan up to $500 with some restrictions, as long as the borrower does not already have an outstanding payday loan. If a borrower takes out more than three loans in quick succession, they must be cut off from more loans for at least 30 days.

2. Limit Automatic Withdrawals – For payday loans and other longer-term loans with an APR greater than 36%, lenders cannot continue to attempt to automatically withdraw funds from the borrower’s bank account after two unsuccessful attempts, unless authorized by the lender. ‘borrower.

The CFPB rule is expected to go into effect in July 2019 — assuming it isn’t snuffed out by the efforts of the payday loan industry and a Republican Congress opposed to regulation. All parties agree that payday loans are expected to drop sharply under this new rule. The CFPB estimates a 55% drop in payday loans, while industry-related estimates are closer to an 80% drop.

According to industry estimates, the current average annual profit of $37,000 will turn into a deficit of $28,000, which will drive most payday loan companies out of business.

Obviously, there is a market for this service. According to the Pew Charitable Trusts, approximately 12 million Americans take out payday loans each year, paying more than $7 billion in fees. The New York Times recently noted that payday loan establishments in the United States outnumber McDonald’s restaurants. If these consumers do not have access to payday loans because of bad creditwhat are their alternatives?

The CFPB expects credit unions and smaller community banks to fill the void. Some credit unions already offer alternative payday loans (ALPs) that are exempt from CFPB criteria. These loans must be between $200 and $1,000, have interest rates below 28% APR, and combined interest rates and fees below 36% APR. Community banks are now in a similar position to offer alternatives, but these are not marketed for one simple reason – just like payday loan outlets, it is difficult for banks to make money on these shorter-term, high-risk loans.

Whether the CFPB rule will protect low-income consumers or push them into riskier – shall we say “unregulated” – forms of borrowing remains to be seen. The CFPB rule can also be thwarted by congressional or presidential action before it can go into effect.

However, we can say with certainty that the best way to avoid being harmed by payday loans is to never take one. Do everything in your power to control expenses and avoid a payday loan situation – and if you have no choice, read the terms carefully so you understand the risks you’re taking.

If you are interested in a personal loan, visit our curated list of best lenders.

Photo ©iStockphoto.com/relif

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