Payday loans have long been used to fill in the gap when extra money is needed. If someone’s lights are about to get cut off or their car breaks down, a payday loan is a way to get extra money fast. Simply write a postdated check to be deposited on a future paycheck date, and receive money the same day. Interest rates on payday loans can often be as much as 300%, and, in recent years, the government has started to pay attention to how these companies operate. The way these loans are structured can often make it difficult to repay the loan. When payday rolls around, those who don’t have enough to pay back the loan, plus the fee, in full end up renewing the loan. This results in repeat borrowing, high interest rates and fees, and repaying more than the amount borrowed.
The Consumer Financial Protection Bureau
After studying payday loans and their effect on consumers, the Consumer Financial Protection Bureau determined that most people borrow funds again within a month. And those with car title loans are often in danger of having their vehicle taken for failure to repay the loan. The Consumer Financial Protection Bureau has proposed a rule that prohibits these lenders from repeatedly trying to debit bank accounts, which often results in multiple non-sufficient fund fees. President Obama has weighed in on the payday loan industry as well, stating, “While payday loans might seem like easy money, folks often end up trapped in a cycle of debt.”
Other Payday Loan Rules
Other rules have been implemented at the state level. For example, in Florida, the borrowing limit is $500. Transaction fees are limited to $10 and borrowers can take out only one loan at a time. As of July 13, 2016, search engine mogul Google has begun banning payday loan ads in an effort to protect consumers from harmful financial products. The ban focuses on ads for any loan that has to be repaid within 60 days and loans that have an APR of 36% or more.
Military Payday Loan Rules
The Military Lending Act protects military servicemen and women from the harmful effects of payday loan, automobile title loans, and tax-refund anticipation loans. The Act prohibits loans that are higher than 36%, loans that carry a prepayment penalty, and loan rollovers that are not in the best interest of the consumer. In addition, the Military Lending Act requires that the APR be fully disclosed.
Payday Loan Industry Response
Payday loan companies are understandably upset about the implications of these new regulations, claiming the new rules will put them out of business. And for some of them, this might be true. The amount of money they make from interest would decrease, they would incur more expenses because of the mandate to underwrite every loan to ensure repayment is possible, and the decrease in profit would prohibit covering their own business expenses.
The payday loan industry feels that consumers should be able to make their own decisions when it comes to borrowing money. Furthermore, they argue that some consumers really do use payday loans as they were intended, for short-term emergencies. However, the fact remains that while these companies advertise that their loans are only meant for a short-term period and that they don’t encourage repeat borrowing, this is often far from reality.