Payday loans could become even riskier for borrowers

 

Payday loans have always been a risky bet for consumers. The short-term loans are usually advertised as a stopgap measure to help consumers with no savings survive unexpected setbacks and make it through to their next paycheck. In theory, the money borrowed is paid back once the consumer receives their paycheck. In reality, however, many consumers find themselves in a lengthy cycle of repeated borrowing that ends up costing them many, many times the value of the original loan.

The Consumer Financial Protection Bureau (CFPB) has long been looking into ways to curb the potential negative impact of these products, and recently proposed new rules designed to protect consumers. The most notable rule changes include a requirement that lenders verify that a borrower is financially capable of repaying the loan, as well as requiring that most small loans be repayable in installments.

Flaws in the plan

According to recent reports from Pew Charitable Trusts, however, these proposed changes don’t go nearly far enough, and in fact, may leave consumers even more exposed to predatory lending practices.

The Pew report argues that these changes would simply lead payday lenders to transition from their typical short-term loans to installment loans with similarly exorbitant fees and interest charges. Many payday lenders have already made that transition. Meanwhile, it’s up to the lender to determine whether or not the borrower is financially solvent enough to manage the loan, which Pew suggests will do little to curb the price gouging that is already rampant.

Stronger regulations

The Pew report goes on to suggest four additional rules changes that would significantly strengthen consumer protections in this market:

  • Establish clear ability-to-repay standards, limiting loan payments to an affordable percentage of a borrower’s periodic income.
  • Allow only interest charges or monthly fees on the loan, and no other fees.
  • Require loans to have reasonable repayment durations.
  • Enact price limits and enable lower-cost providers to enter the small-dollar loan market.

These changes would put a much more clearly defined cap on the costs of a short-term loan, as well as create a larger, more competitive marketplace, driving down costs as a result.

As always, no matter what changes do occur in the industry, it’s in your best interest to do all you can to avoid using short-term loans. If you have the ability to put money into savings, do so. Even putting unexpected expenses on a credit card is usually a less expensive option than taking out a payday loan.

If you feel as though you are one setback away from disaster, consider speaking to a financial counselor. There may be options available to help you create a more balance budget and improve your overall financial wellbeing.

Jesse Campbell is the Content Manager at MMI. All typos are a stylistic choice, honest.

  • The Consumer Federation of America (CFA) is an association of nonprofit consumer organizations that was established in 1968 to advance the consumer interest through research, advocacy, and education. Today, nearly 300 of these groups participate in the federation and govern it through their representatives on the organization's Board of Directors.
  • The National Council of Higher Education Resources (NCHER) is the nation’s oldest and largest higher education finance trade association. NCHER’s membership includes state, nonprofit, and for-profit higher education service organizations, including lenders, servicers, guaranty agencies, collection agencies, financial literacy providers, and schools, interested and involved in increasing college access and success. It assists its members in shaping policies governing federal and private student loan and state grant programs on behalf of students, parents, borrowers, and families.

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