New CFPB rule ready to hit payday loans
After five years of study, the agency is striking back against “debt traps”, but you’ll still have options for short-term loans.
The Consumer Financial Protection Bureau is ready to publish a new rule regulating the most harmful portion of quick and easy payday loans that lead borrowers into a hard-to-break cycle of borrowing new money to pay off older payday loans. It’s what the CFPB calls a “debt trap”, and when that cycle is repeated, fees can quickly add up to more than the original amount borrowed.
MarketWatch reports that the government agency studied the effects of payday loans for five years and then modified its proposed rule based on more than a million comments from the public. What it learned is that 12 million payday loan borrowers spend $9 billion in fees each year, with the average person paying $520 to borrow and re-borrow $375 over the course of five months.
The new rule also applies to other short-term loans like auto title loans and deposit advances, and it targets lenders who require the full loan amount to be repaid all at once, rather than spread out over time with multiple payments. It adds a full-payment test requiring some borrowers to prove they have enough income to pay back the money, and it limits the number of times you can get a loan back-to-back.
Therefore, the CFPB’s new rule is effectively pointing consumers toward “less risky” installment-type payday loans and small personal loans from banks or credit unions.
The new rule has yet to be published and will take effect 21 months after it officially is introduced.
If you’re looking to borrow money for the short term, take note that payday loans are only legal in 35 states, so first check whether you can even get one.
Learn more in finder.com’s guide to payday loans, and get the best deal for your situation by comparing your options for payday loans, auto title loans, cash advances, installment loans and other types of personal loans.