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.
Key First Step to Stopping the Debt Trap
The Consumer Financial Protection Bureau (CFPB) has finalized a rule governing these high-cost loans.
The payday lending rule will result in fewer families falling into financial ruin. At the heart of the rule is the common sense principle that lenders check a borrower’s ability to repay before lending money. While praising the CFPB for pushing to stop the debt trap, the coalition calls on the Bureau to build on this progress by quickly working to develop regulations to protect consumers from abusive long-term, high-cost loans. Also, strong state laws, such as rate caps, must continue to be defended and enacted.
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.