New payday loan protections for consumers
A rule to prevent roll over charges and refinancing.
New consumer protections have been created to ensure potential borrowers can afford to repay their debts before being approved for payday loans, where lenders provide cash on the basis it’s repaid in one lump sum.
The Consumer Financial Protection Bureau (CFPB) finalized a rule to prevent roll over charges and refinancing on payday loans, auto title loans, deposit advance products, and longer-term loans with balloon payments.
A payday loan is a short-term form of credit that can get you cash quickly even if you have bad credit or a low income. Because of their speed and lax requirements, payday loans typically have a high annual interest rate.
Traditionally, payday loans had to be repaid in one lump sum on your next payday. However, these days you can source lenders hawking larger payday loans with terms as long as six months.
More than four out of five payday loans are re-borrowed within a month, typically when the loan is due or shortly thereafter. Almost one-in-four initial payday loans are re-borrowed nine times or more, with the borrower coughing up more in fees than they received in credit. As with payday loans, the CFPB found the vast majority of auto title loans are re-borrowed on their due date or closely thereafter.
Consumers can end up taking on new debt to repay old debt and spawn a costly, long-term debt trap cycle.
The CFPB’s new rule diminishes a lender’s ability to repeatedly attempt to draw payments from a borrower’s bank account, which can lead to increased or excessive customer fees and sometimes account closures.
The rule forces lenders to conduct a full-payment test, which ensures borrowers can take out a loan, make the required repayments and still meet basic living expenses and any major financial obligations they may have.
For certain short-term loans, lenders are permitted to skip the payments test if they offer clients a principal-payoff option that allows borrowers to establish a more gradual debt repayment scheme.
Lenders offering less risky loan options can also exempt borrowers from undergoing a full-payment test.
The rule also imposes a debit attempt cutoff for lenders against any short-term, balloon-payment or longer-term loans with an annual percentage rate that is higher than 36%, preventing repeated withdrawal attempts.
The CFPB also requires lenders to use registered credit reporting systems to report and obtain information.
The rule comes into effect 21 months after it is published in the Federal Register. All lenders who regularly extend credit are subject to the CFPB’s requirements for any loan they make that is covered by the rule. This includes both online and storefront banks, credit unions, nonbanks, and their service providers.
Need something to bridge the gap until your next payday? Compare payday loans to find the right one for you.
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