Payday loans should be a last-resort option for people who need money fast. The interest rates are extremely high, especially when refinanced, so they should only be used in an emergency and paid back immediately. Unfortunately, some of us have found ourselves in binds where we couldn’t pay it back right away and had to keep renewing. This is when we get trapped.
That’s why the Consumer Financial Protection Bureau (CFPB) continues to keep tabs on these types of lenders. Their set of rules is the government’s way of trying to protect the consumer from getting trapped in endless debt cycles.
What is the CFPB?
The CFPB, in their own words is a “U.S. government agency that makes sure banks, lenders, and other financial companies treat you fairly.”
In a nutshell, they are there for you, the consumer. They are an agency that was established to protect you and work together with fair lenders to keep people like us from getting ripped off.
CFPB Payday Lenders Rules
In late 2017, the CFPB issued a new set of rules governing entities like title loan and payday lenders that the industry doesn’t necessarily agree with.
Lenders in the industry claim that payday loans provide a fast option for people in emergency situations who have nowhere else to turn, while some consumer advocates feel these lenders just trap people in cycles of debt they can never get out of. So, what do the new rules look like?
First, the CFPB requires that before making a loan with balloon payments, they have to first determine that the consumer is able to pay it back. This is quite a change for payday lending establishments since they usually operate on a no-credit-check basis, lending cash to people who might otherwise be turned down.
Second, they have set a limit on the number of attempts a lender can make to withdraw a loan payment from a consumer’s account without specific authorization after the second attempt. In the past, these lending institutions had no limit to the number of attempts they made to withdraw funds.
Why the Disagreement?
Consumer advocates, including the Center for Responsible Lending, who says that “Payday loans are a debt trap by design and lead to cascade of other financial consequences such as increased overdraft fees and even bankruptcy.”
But people in the industry argue that this is one of the only ways to provide cash to people who need it quickly, who can’t get a loan anywhere else, and are easy to obtain.
What’s the Verdict?
While the Bureau continues to try to crack down on payday lenders, the industry and certain lawmakers continue to fight back. As of this moment, the new rules seem to be hanging in the air, so to speak, since it is not quite clear who will win this battle. It’s likely that the issue will be tied up for a while and it doesn’t look like quick-loan lenders are going anywhere for the time being.
It’s certainly true that you can quickly find yourself in a debt-trap if you’re not careful, but it’s also true that sometimes we don’t know where else to turn. We have all found ourselves in situations where an emergency dictated how quickly we needed funds. The best course of action is to set up an emergency savings account of at least $1,000 so that you won’t have to be out more cash than necessary. But if you find yourself in the predicament of needing to take out a payday loan, do so responsibly and fully-informed.
Also, pay it back immediately and do your best not to renew it.
Have you ever found yourself in a debt-trap? What did you do to get out?