Bankruptcy Law Blog

Thursday, June 23, 2016

Beware of Payday Lenders

What is the government doing to rein in payday lenders?

The Consumer Finance Protection Bureau recently proposed new rules aimed at bringing payday lenders and other short-term credit providers under federal jurisdiction. Consumers who are strapped for money often use these lenders as a short-term fix, but invariably wind up with long-term problems and falling into debt traps. While these lenders are currently regulated by the states, borrowers are often the target of lending abuses.

"Too many borrowers seeking a short-term cash fix are saddled with loans they cannot afford and sink into long-term debt," said CFPB Director Richard Cordray.

What are Payday Loans?

Payday loans are small, short-term loans of about $350 that are supposed to be repaid when a consumer gets his or her paycheck. These loans usually carry exorbitant fees ranging from $10 to $20 per $100 borrowed. The CFPB estimates this is equivalent to a 390 percent annual rate when borrowers cannot make the repayment, subsequently take another loan, incur additional fees, and eventually become trapped in debt. In addition, these loans are often paid by automatic deductions from consumers' bank accounts that often result in overdraft fees.

The proposed rule would require payday lenders to conduct a review of a consumer's ability to repay a loan, have sufficient income and available funds to pay for living expenses. Lenders will also be required to check a consumer's credit report, justify second and third loans. The rule also caps the number of successive loans at three, mandates a 30-day cooling off period before a borrower can take out another loan, and includes a number of other new consumer protections.

Consumer advocates generally support the proposal, but also believe the CFPB needs to do more to ensure these short-term loans are safe and cost less. For its part, the payday industry contends the rules will stop borrowers from getting money to fund short-term emergencies, leading them to seek out "less savory" lenders.

In the final analysis, people with poor credit are often forced to rely on payday lenders, only to find themselves deeper in debt. If you have debts that cannot be repaid, an experienced bankruptcy attorney can negotiate a settlement with your creditors, or in the alternative, advise you about filing for bankruptcy.

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