A limit on loan payment size of 5% of income will not prevent borrower harm
As federal and state lawmakers and regulators work to rein in harmful debt-trap payday lending, a few parties have recommended a solution that the overwhelming majority of consumer advocates and research organizations find to be unhelpful. Basing reform of abusive consumer lending on limiting the payment to 5% of a borrower’s income, while disregarding a borrower’s expenses, allows payday lenders and others to continue trapping consumers in loans they cannot afford to pay off. This analysis outlines the weakness in this approach. A cap on interest rates or 36% of less is the most efficient and effective way to prevent predatory lenders from trapping families in a cycle of unaffordable debt.