How Will the New Payday Loan Regulations Affect You?
The CFPB (Consumer Financial Protection Bureau), which is the agency created by President Obama during the 2008 financial crisis, is taking a very aggressive step against payday lenders. They are proposing new regulations that would constrict payday loans that have higher interest rates than 400%. This would apply to a substantial portion of the over $46 billion payday lending market that typically serves the working class, and many people who live paycheck to paycheck, and don’t have access to a more traditional loan. These regulations would have no impact on short-term, high-interest loans, however they would require that lenders ensure that their borrowers have the ability to repay their loans.
The Payday Loan Initiative
The initiative that was released by the CFPB would drastically decrease the amount of loans that are deemed unaffordable to consumers that payday lenders give out every year to U.S. citizens that are strapped for cash. This means that you may have a harder time being able to obtain a payday loan, as requirements to obtain one will become stricter. However, loopholes in the initiative would still allow millions of people to be able to obtain payday loans despite new regulations. For instance, lenders can still give out six loans every year to a borrower.
Limit in Choices
The new initiative may be out to regulate payday lenders for the good of the consumer, however it may also cause a choking in credit. Consumers like to have a variety of credit options, and so limiting this may not be in the consumers’ best interest. The CFPB should be cautious in order to ensure that a variety of credit options remain open.
The stricter regulations mandated by the bureau would require that lenders assess income more closely, as well as any other borrowing history and financial obligation that you have before deciding whether or not you’re credit worthy. This would make payday loans much more like traditional bank loans. Payday lenders will also need to ensure that when the loan is due to be repaid, you would be able to make the payments in full. These regulations will also affect loans that are backed by collateral, as well as some installment loans that are taken out for longer than 45 days.
The Amount That You Borrow May Be Limited
Instead of the tight scrutiny, the bureau may instead decide to implement that loans can’t be lent out for greater than $500. This would also mean that lenders would not be allowed to roll over loans more than twice over the course of a year, and would mandate that before you made a second or third loan, payday lenders would be required to give you a more affordable way of getting out of debt. Loans that are taken out for more than 45 days will require an interest rate cap of 28%; otherwise lenders would not be allowed to charge monthly payments that were more than 5% of a borrower’s income.
No Last Resort Options
The bottom line is that payday loans typically aren’t anyone’s first choice when it comes to credit options, however often times the people who need to take out payday loans are the ones who are living paycheck to paycheck and have no other way of getting the cash they need in order to pay for basic amenities such as rent and food. Although this initiative was created in order to protect consumers from extremely high interest rates, in reality they may be limiting the options that they have and leaving nowhere for families to turn to in times of needs. Although the lower interest rates mandated by the initiative would be of benefit to consumers, the stricter control on who is and isn’t allowed to obtain a payday loan based on income and other factors is taking the control out of the consumer’s hands and placing it with payday lenders.