Rollbacks in payday loan legislation could allow predatory lenders an advantage, leaving borrowers to remain trapped in loans with a never-ending cycle of fees and collection threats. Under laxer regulation lenders would continue to thrive with profits. Meanwhile, borrowers are at risk. Consumers need to be aware of the traps associated with payday loans.
CFPB Payday Lending Rules
Rules from the Consumer Financial Protection Bureau (CFPB) were set to begin on August 19, 2018. But these new rules are considered complex and not very transparent. Questions remain whether payday loans with high-interest rates should even exist. Among the objection to the new rules was a lack of competition for lenders and reward for borrowers who pay loans on time.
To protect consumers from abusive payday lending traps, the proposed rules include:
- Testing for borrowers’ ability to repay
- Limiting loan rollovers
- Requiring borrowers’ authorization for debiting bank accounts
The Predatory Lending Trap
Payday loans have never been a preferred funding source. Lenders target consumers that have difficulty obtaining loans from more reputable sources. Instead of seeking a long-term strategy with the help of a debt lawyer, a payday loan is a short-term fix. While a payday loan might appear attractive, its fine print traps borrowers with fees.
The intent behind a payday loan is that it should be paid off immediately on payday. But as many people live paycheck to paycheck, a payday loan borrower is unlikely to be able to do that. When that happens, the loan must be renewed, often with a sizable, and upfront application fee. These fees add up quickly and provide lenders with a stream of revenue. Meanwhile, the principal amount of the loan barely goes down.
The borrower is caught in a cycle of paying high fees and never gets out of debt. He or she could be at risk of default with harassing phone calls or money taken out of their bank account.
Avoiding Payday Loan Traps
Consumers should avoid becoming trapped in payday loans. Instead, they should seek other finance options from reputable lenders. When reputable finance options are not possible, and consumers find themselves caught in a loan trap, a debt lawyer could help stop unreasonable collection attempts and harassment.