Americans have been reminded of the risks presented by payday loans following a rule change that makes it easier for payday lenders to give small dollar loans to customers who may not be able to afford to repay them.
The decision (opens in new tab) by the Consumer Financial Protection Bureau (CFPB) to rescind its 2017 payday loan rule has provoked concern that millions of Americans could quickly slip into a cycle of debt, particularly given the heightened financial pressures being felt by many households due to the coronavirus pandemic.
The original idea behind the 2017 rule was to limit harmful lending practices while keeping credit available to consumers. This was achieved by requiring that payday lenders prove customers had the means to pay off any short-term loan in full within two weeks. The revised rule, however, adopted by the CFPB earlier this week, discards the need for lenders to check whether the loan is affordable to borrowers.
What has the response been?
The move has provoked an angry response from consumer advocates concerned about the consequences the rule change might have for those who turn to payday loans (opens in new tab) for short-term funding.
“By eliminating the ability-to-repay protections, the CFPB is making a grave error that leaves the 12 million Americans who use payday loans every year exposed to unaffordable payments at annual interest rates that average nearly 400%,” said (opens in new tab) Alex Horowitz, senior research officer at the Pew Charitable Trusts.
“The 2017 rule was working. Lenders were beginning to make changes even before it formally took effect, safer credit was already starting to flow, and harmful practices were beginning to fade. Today’s action puts all of that at risk.”
It is a viewpoint with which Lauren Saunders, National Consumer Law Center Associate Director, agrees (opens in new tab).
“At this moment of health and economic crisis, the CFPB has callously embraced an industry that charges up to 400% annual interest and deliberately makes loans that put people in a debt trap,” she said. “The CFPB has no basis for gutting the heart of common sense protections that merely required payday lenders to do what responsible lenders already do: ensure that the borrower has the ability to repay. The evidence to support the debt trap of payday loans is overwhelming and the CFPB’s flimsy excuses for repealing protections do not stand up.”
Why have the rules been changed?
On its part, the CFPB said the thinking behind the rule change was to make sure those who needed a small dollar loan would be able to get one, including consumers who might need a payday loan as a result of the current pandemic.
“A vibrant and well-functioning financial marketplace is important for consumers to access the financial products they need and ensure they are protected,” said CFPB Director Katy Kraninger.
“Our actions today ensure that consumers have access to credit from a competitive marketplace, have the best information to make informed financial decisions and retain key protections without hindering that access.”
What should consumers do?
For those currently struggling to make their finances add up, approaching a payday lender might seem the only option. Indeed, if managed sensibly, and repaid on time, the best payday loans (opens in new tab) could have a part to play in helping to bridge the most urgent of financial gaps, perhaps to meet a final-demand bill or rent payment that would result in even greater expense if it wasn’t paid.
That said, the extremely high costs associated with payday loans, and the often onerous terms, means that this type of loan should almost always be seen as an option of last resort, and only ever properly considered once all of the potential alternatives (opens in new tab) have been explored.
What are the alternatives to a payday loan?
If you need access to funds fast, providers of the best personal loans online (opens in new tab) can often deliver a quick turnaround and sometimes get the money you need into your account within a day. It will certainly prove cheaper than a payday loan and you’ll have longer to pay back what you owe too.
The best credit cards (opens in new tab) are another potential alternative to a payday loan if you have a little more time on your side, while the best auto loans (opens in new tab) should be the first port of call if you need a vehicle fast - a payday loan should never be used to make a purchase such as this. Inevitably, some will not have the credit score or credit history required to take advantage of these preferred loan options, but this can almost always be improved with the help of the best credit repair services (opens in new tab).
For those who are already struggling with debt, and considering a payday loan as a way to elicit some relief, the advice has to be that you should not. If you take out a payday loan but don’t have the means to pay it back when you should, you will end up in an even more serious situation than you were in before. Getting in touch with a credit counseling agency is one path you should consider, while the best debt consolidation companies (opens in new tab) and debt settlement companies (opens in new tab) can provide invaluable advice, and the chance of working towards a future less burdened by debt.