A payday loan also termed as cash advances is relatively small sum lent at a high-interest rate which is expected to be paid on receiving the next wages. Payday and similar loans lead the borrowers to get trapped in their debt. The payday is taken by the person when there is a shortage in cash to make the ends meet. In addition to other fees, these loans carry an average rate of more than 300% which become debt traps to some. Thus, Consumer Financial Protection Bureau has projected rules to end payday traps that help lenders in determining the payback affordability of the borrowers.
Most of the customers taking payday loans don’t afford to pay all the money back through their next paycheck.
•Most of the people taking payday loans end up taking more loans in the same period for which they pay more fees and interest for the same debt.
•In the case of online payday loans, the online lenders’ repeated attempts to debit the due from the borrowers’ account adds to the significant costs to the borrower in the form of bank charge. The bank penalty is levied on the borrower for the deficit of funds on the check deposited by the lender.
Thus the consumers are trapped into a cycle of debt as the consumers are entitled to pay steep fees on the amount borrowed along with the sum borrowed and additional bank charges.
The rules will make the lenders and other companies offering short-term loans to keep a check on the borrower’s affordability. But then, the borrower’s income or credit standing is not to be looked upon in the case of the amount of loan less than 500$. The rules will also put a cap on the times a borrower can take a loan again resulting in repeated payday loans. The cool-down period will be given to borrowers in which they will not be able to take another loan. For a smaller amount of loans which is less than $500, vigorous payment test is not mandatory but the rule wants the borrower to pay the debt each time when rolling over the loan.
•The rules primarily targets on payday loans, and high-cost loans which customers take with the expectation of paying it back with their next payback.
•The installment loan which is different from payday loans is also covered.
•The car loans which puts up the car as collateral security is also subjected to the rules
•Though borrower’s ability to pay is not to be proved, the lenders and company offering payday loans will have to check for the income of the customer.
The CFPB is also trying to cut down on the fees levied on overdraft which the borrowers face when payments fall behind. Thus, according to the new rules, the lenders have to notify the customer at least in prior to 3 days before making an electronic withdrawal of the due payment. If the payment is failed after 2 attempts, then the lenders would be blocked from debiting the account again till the approval of borrowers.
The rules may come into effect mostly from next year to protect the payday loan borrowers from the trap. You can also opt to hire services of a direct payday loan lenders instead of a broker. Doing this you can be sure about the company you’re dealing with, making it easier for you to look into their reputation and know the rules and regulations of the conduct they follow.