The U.S. Consumer Financial Protection Bureau has proposed a series of regulations on Thursday which would limit the extent to which payday lenders can offer their services, in the interest of protecting low-income loaners.
The CFPB proposes that lenders put harsher restrictions on the amount a person can loan, so that the risk of taking another loan to cover the initial one or even defaulting will be significantly lower. Borrower-wise, a 60-day cooling off period would be enacted after taking a loan, during which the individual would not be able to file for another one.
Payday loans, as they are called, are usually small-term, easy-to-get loans which are supposedly made for people that are in need of money before they get their paychecks. With over 12 million Americans borrowing from such lenders every year, the payday loan is an emerging and fruitful market worth about $46 billion.
However, the catch is that most such loans have an immense interest rate, mostly about 100 percent and sometimes even reaching 400 percent. A 2013 CFPB analysis showed that on average, a two week $400 dollar loan will stuck a 339 percent interest rate to the borrower’s finances. This comes despite the fact that the average borrower earns less than $23,000; this also shows in the fact that most loans are either rolled over – making for more hefty fees when paid back – or even covered by taking other loans.
It’s because of these stats that the CFPB states that payday lenders are catching low-income citizens in “debt traps”, a loop in which new loans must be continuously taken so that older loans might be paid. Other contesters point out that such businesses generate profit by feeding on the inability of poorer borrowers to pay them back in full.
President Barack Obama supported the CFPB stance during a speech he held at a Birmingham, Alabama college by stating that:
“As Americans, we don’t mind seeing folks make a profit. And if somebody lends you money, then we expect you to charge interest on that loan. But if you’re making that profit by trapping hardworking Americans into a vicious cycle of debt, you got to find a new business model. You got to find a new way of doing business.”
Image Source: Payment Week