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Proposed Regulations of Payday Loans May Protect Consumers from Predatory Lenders


Payday loans, car title loans, or other short-term lending options may seem like a convenient way to get credit when you’re out of other options. However, payday loans can often prove difficult to pay back and trap borrowers in a vicious cycle of borrowing yet more loans to be able to afford payments on the previous loans. The average payday loan borrower ends up being in debt for six months, and pays on average $520 in fees for $375 in credit. You should avoid them if at all possible. If you get stuck in this trap, you can use bankruptcy to get rid of payday loans.

Recently, the federal government has turned its attention to regulating these loans. The Consumer Financial Protection Bureau, or CFPB, published a proposed set of regulations on payday lenders that would place limits on the $46 billion short-term lending industry’s ability to charge exorbitant interest on its loan products.

The CFPB has proposed regulations that would require longer-term lenders, which extend beyond 45 days, to check the potential borrower’s creditworthiness and ability to pay back the loan before making it. Some longer-term lenders would also need to cap their interest rates at 28%, or limit monthly payment amounts to 5% of the consumer’s gross income. Short-term loans, due within 45 days of being made, would be capped at $500 under the proposed rules. Additionally, if a borrower seeks to roll the existing loan over into a new loan more than twice within 12 months, the lender would first be required to offer a payment plan that the borrower could afford before rolling over the loan. Consumer groups have largely concluded that such regulations allow loopholes that would make lenders able to escape the more cumbersome regulations, but all agree that payday lending is a field sorely in need of reform.

Research shows that about 70% of short-term or payday loans are taken out so that the borrower can afford day-to-day expenses. Borrowing money in order to meet basic costs, however, can lead to the borrower continually needing to borrow more to make ends meet. As a result, around 75% of the fees generated by short-term loans can be accounted for by borrowers who have taken out 11 or more loans. States currently regulate payday lenders, and while some states have sharply limited the predatory lenders’ ability to trap customers in debt loops, many states have allowed the lenders free reign. Interest rates can climb as high as 400% on such loans, and monthly payments can account for up to 36% of a borrower’s income, despite research showing that most such borrowers can only truly afford a payment that accounts for 5% of their monthly income. There is no nationwide law mandating that short-term loan payments are affordable for the borrower.

Payday loans can create a dangerous, hard-to-escape cycle of debt. If you feel trapped in a loop of taking out loan after loan simply to afford your daily expenses, seek help. Contact the compassionate Maryland attorneys at Haeger Law for a consultation on ways to manage your consumer debt.