The business model of payday lenders is based on making loans that borrowers cannot repay without re-borrowing and paying even more commissions and interest. In fact, these lenders earn 75 percent of their money from borrowers caught on more than 10 loans in a year. The Consumer Financial Protection Bureau is responsible for overseeing payday loans and, earlier this month, announced that it was delaying changes to payday regulations. Today, at The Indicator, we look at the payday loan business and what it's like to enter a debt cycle with payday lenders.
Everyday people are devastated by the payday loan debt trap. They turn to payday lenders for a short-term need for cash and end up stuck for months, even years, paying large fees on small loans without being able to pay them once and for all. Driven by fear of returned checks or false threat of processing, payday borrowers are forced to pay loan fees before paying basic living expenses such as rent, mortgage and electricity. Although marketed as a quick financial solution, long-term debt is the typical borrower experience and the core of the business model.
With each new loan or loan change, borrowers cannot repay the lender and have enough money left until the next payday arrives. Payday loans are a debt trap by design and lead to a cascade of other financial consequences, such as rising overdraft fees and even bankruptcy. A recent trend is for payday lenders to make multiple payday installment loans, which can be for larger amounts and extend the cycle of high-cost debt even further. Payday loans are designed to cover short-term expenses and can be taken out without collateral, not even a bank account.
The problem is that these loans charge very high rates and interest rates. The Consumer Financial Protection Bureau (CFPB) today finalized a rule that aims to stop the pitfalls of payday debt by requiring lenders to determine in advance if people can repay their loans. These strong, common-sense protections cover loans that require consumers to pay all or most of their debt at once, including payday loans, car title loans, deposit advance products and longer-term loans with lump sum payments. The Office found that many people who apply for these loans end up repeatedly paying costly charges to renew or refinance the same debt.
The rule also reduces repeated attempts by lenders to debit payments from the borrower's bank account, a practice that accumulates commissions and can result in account closure. These longer-term loans, often referred to as lump sum loans, often require access to the borrower's bank account or car title. He worked down the street from the payday store, and since he was short on money, he called to see what he needed to get a loan. Under federal law, lenders cannot condition a payday loan on obtaining a consumer authorization for “pre-authorized (recurring) electronic fund transfers”.
In most cases, you can find loans in the form of cash advances, instant online loans and “one-hour loans”. In the 32 states that allow payday loans, borrowers can generally apply for one of these loans by going to a lender and providing only valid identification, proof of income, and a bank account. More than four out of five payday loans are reborrowed in a month, usually right when the loan is due or soon after. Sandy was caught in the payday loan debt trap, taking several loans to pay each other's fees as they matured.
Some payday lenders try to get their money back by taking what they are owed directly from borrowers' checking accounts, to which borrowers grant access as a condition of the loan. And by the next payday, you still can't pay your bill and decide to get another payday loan to pay off the first one, and the cycle continues twice more. Payday loans are usually for small amounts and are due in full before the borrower's next paycheck, usually two or four weeks. .