In an effort to protect struggling Americans and their money, President Obama is supporting new rules proposed by the Consumer Financial Protection Bureau that would help prevent consumers from harmful payday loan debt traps.
In theory, payday loans are short-term, high-interest loans intended to help Americans who need a little extra cash to tide them over between paychecks. Unfortunately, many borrowers end up extending the loans because they can’t pay them off in full. Meanwhile, excessive interest and fees continue to accumulate, trapping consumers in a seemingly never-ending cycle of debt.
I could go on, but basically, payday loans are bad news and most often hurt those who are least able to afford it.
The CFPB’s new proposal, which would also cover vehicle title loans and other specific high-cost installment and open-end loans, would require lenders to take steps to ensure that borrowers can pay back their loans. For example, lenders would need to verify borrowers’ incomes before giving a loan their stamp of approval.
Sounds pretty basic, right? President Obama thinks so. In a speech Thursday at Lawson State Community College in Birmingham, Alabama, Obama said: “The idea is pretty common sense: If you lend out money, you have to first make sure that the borrower can afford to pay it back.”
Until now, the multibillion-dollar payday industry has primarily been regulated by the states. But more needs to be done, the CFPB said.
The CFPB recognizes consumers’ need for affordable credit but is concerned that the practices often associated with these products – such as failure to underwrite for affordable payments, repeatedly rolling over or refinancing loans, holding a security interest in a vehicle as collateral, accessing the consumer’s account for repayment, and performing costly withdrawal attempts – can trap consumers in debt. These debt traps also can leave consumers vulnerable to deposit account fees and closures, vehicle repossession, and other financial difficulties.
The payday loan industry argues that the rules would prevent millions of Americans who live from paycheck to paycheck from accessing credit. “New rules must achieve the delicate balance of preserving consumers’ access to credit, while enhancing consumer protections,” said the Community Financial Services Association of America.
Obama said charging a reasonable amount on interest on a loan is acceptable, but trapping struggling Americans in an expensive cycle of debt and fees cannot be tolerated:
“As Americans, we believe there’s nothing wrong with making a profit. But if you’re making that profit by trapping hardworking Americans into a vicious cycle of debt, you’ve got to find a new business model.”
Find out more about the CFPB’s proposal to end payday debt traps.
I took out a few payday loans after college when I was making about $6 an hour and living paycheck to paycheck as a TV reporter. The interest rates and fees were so ridiculously high that after I paid the loan off, I was broke again and often forced to take out another payday loan. It truly was a vicious cycle, so I applaud the CFPB’s efforts to try and regulate these predatory loans.
What do you think about the CFPB’s proposal? Do you have any experience with payday loans? Share your comments below or on our Facebook page.