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Are payday lending rules about to get tougher, and what are the alternatives to payday loans?

Are payday lending rules about to get tougher, and what are the alternatives to payday loans?
(Image credit: Getty)

Consumer advocates have filed a lawsuit asking for the reinstatement of tougher payday lending rules amid concern over the risks that payday loans present to borrowers. In a complaint filed to the US District Court for the District of Columbia, the National Association for Latino Community Asset Builders called for a return to the requirement that payday lenders ask customers for proof that they can repay what they borrow before a payday loan is approved. 

Similar safeguards that had previously been in place since 2017 were removed by the Consumer Financial Protection Bureau (CFPB) in July (opens in new tab), much to the dismay of consumer groups. 

“This rule is a slap in the face to consumers and is particularly ill-timed when so many people are facing financial distress due to the pandemic,” said (opens in new tab) Rebecca Smullin, the Public Citizen attorney serving as lead counsel on the case. “The CFPB’s rule appears to be crafted solely to boost lenders’ profits, contrary to the consumer financial protection mission of the agency.”

Why were the rules relaxed? 

The rules that were implemented in 2017 followed five years of research that found a “substantial” number of borrowers were being harmed by the payday loans that they had been allowed without lenders considering their ability to repay them. In order to protect consumers against a practice that the CFPB concluded was “unfair and abusive”, the requirement was placed on lenders to only approve payday loans to borrowers who could prove they had the means to pay off the debt in full within two weeks. 

Are payday lending rules about to get tougher, and what are the alternatives to payday loans?

(Image credit: Getty)

Three years later, however, and with the pressure on household finances ramping up against the backdrop of the coronavirus pandemic, the requirement was dropped by the CFPB. The rationale behind the u-turn was to make sure those who needed a payday loan (opens in new tab) urgently would be able to get one. Now, however, the fight has begun to have the rule reinstated. 

“The pain caused by gutting these protections will be felt most by those who can least afford it, including communities of color who are disproportionately targeted by payday lenders,” said Will Corbett, litigation director at the Center for Responsible Lending. “The CFPB spent five years developing these consumer safeguards, taking input from lenders, faith leaders, veteran and military organizations, civil rights groups, consumer advocates, and consumers from across the country. Reversing course, without any rational basis for doing so, as the COVID-19 pandemic continues to ravage the economy, will only push struggling families closer to the brink.”

Should you take out a payday loan?

If you’re struggling to make ends meet, and a payday loan seems your only choice, then careful thought is always required. When managed responsibly, and assuming they are repaid on time, the best payday loans (opens in new tab) might prove a valid solution to bridge the gaps that you have in your finances. This might be the case if you’re on final warnings on bills or your rent that could cause you even greater expense if they’re not paid. 

Importantly, however, the extremely high interest rates and fees that come with payday loans should never be overlooked. And as a result, these types of loan should almost always be considered only as a last resort, after all other alternatives (opens in new tab) have been ruled out. 

Are payday lending rules about to get tougher, and what are the alternatives to payday loans?

(Image credit: Getty Images)

The alternatives to a payday loan

If you need money quickly, a good place to start is the best personal loans online (opens in new tab). The funds can sometimes be in your account with the space of a day, and this type of loan will always be less expensive - and less risky - than a payday loan. The terms of these loans mean you should have years, rather than days and weeks, to pay back what you borrow as well. 

If you can wait a little longer for your funds, the best credit cards (opens in new tab) are another potential option, while if you’re looking to borrow in order to buy a new car, the best auto loans (opens in new tab) should be explored too. Should your credit score be holding you back when it comes to arranging these types of loan, remember that the best credit repair services might be able to help give your rating the boost that it needs.

For anyone who already has existing debt weighing them down, it’s vital to remember that a payday loan is unlikely to provide the long term relief that you need, and will probably only make your situation worse. Talking to credit counselors should probably be the step that you need to take, along with seeking advice from the best debt consolidation companies (opens in new tab) and debt settlement companies (opens in new tab) to see how they might be able to help. 

With over 20 years’ experience in the financial services industry, Tim has spent most of his career working for a financial data firm, where he was Online Editor of the consumer-facing Moneyfacts site, and regularly penned articles for the financial advice publication Investment Life and Pensions Moneyfacts. As a result, he has an excellent knowledge of almost areas of personal finance and, in particular, the retirement, investment, protection, mortgage and savings sectors.