Payday loans are marketed as one time ‘quick fix’ consumer loans – for folks facing a cash crunch. In reality these loans create a long term cycle of debt, and a host of other economic consequences for borrowers.
Payday lenders charge 400% annual interest on a typical loan, and have the ability to seize money right out of borrowers’ bank accounts. Payday lenders’ business model relies on making loans borrowers cannot pay back without reborrowing – and paying even more fees and interest. In fact, these lenders make 75 percent of their money from borrowers stuck in more than 10 loans in a year. That’s a debt trap!
No wonder payday loans are associated with increased likelihood of bank penalty fees, bankruptcy, delinquency on other bills, and bank account closures.
A New Hope for Reform
The Consumer Financial Protection Bureau (CFPB) has issued a draft rule governing these high-cost loans.
This is once-in-generation opportunity. The Consumer Financial Protection Bureau has put forth a proposal to rein in the worst abuses of payday and car title lending. The proposal, as written, has some useful elements, but also significant loopholes. These lenders evaded the Military Lending Act to continue exploiting service members and have defied state referendums enacted by voters. If the loopholes in this rule are not closed before it is finalized, lenders will aggressively exploit them as well, creating the appearance of change while largely continuing business as usual. There is still time to make the rule stronger, but the CFPB needs to hear from you. Send comments calling on the CFPB.
A Strong Rule Should Include
- An ability-to-repay test, based on income and expenses, with no exceptions: Apply it to every single loan where the lender takes control over the borrower’s checking account, car, other property, or wages.
- Stronger protections against flipping loans: Ensure borrowers can’t be stuck in so-called two-week loans for three months or more, and prevent serial flipping of longer-term loans.
- Enhance strong state laws: The rule must not undermine states that prohibit these high-cost abusive loans, and it should deem a violation of state law an unfair practice.
- Close the loopholes: Ensure lenders can’t game the rule in a way that leaves borrowers without enough money to live on.
Car Title and Installment Loans
Car title and installment loans are variations on the same theme. Car title lenders use a borrower’s vehicle as collateral for their unaffordable loans. Installment loans typically have longer payoff periods and replace slightly lower interest rates with expensive, unnecessary ad-on products.