The Consumer Financial Protection Bureau (CFPB) announced new rules on payday loans this week that will help low-income borrowers and families trapped in a cycle of debt. Payday loans are typically between $200 and $1,000 and must be paid back as soon as the borrower receives his or her next paycheck.
On average, a fee of $15 for every $100 borrowed is charged, according to the Community Financial Services Association of America (CFSA). That is an annual interest rate of 391%.
The CFPB argues that most customers who take out the loans are already in financial trouble and cannot afford the fees and penalties associated with these loans. Approximately four out of five payday loan customers re-borrow their loan within a month.
Here is what the new payday lending rules will do:
Qualify borrowers– Lenders will need to check a borrower’s income, living expenses and their major financial obligations, like their mortgage and car payment, to qualify them for the loan. In most cases this will involve pulling their credit report.
Rules for loans under $500– Borrowers will not necessarily need to be qualified for these, but they must pay at least one-third of their loan back before they can take out another. Frequent borrowers and those who cannot afford to pay back the loans will be prevented from borrowing, again.
Limits on the number of loans– If a borrower takes out three payday loans back-to-back, lenders must cut them off for 30 days. Also, unless they can prove an ability to pay it all back, borrowers cannot take out more than one payday loan at a time.
Penalty fee prevention. Lenders cannot continue trying to withdraw payments from a borrowers’ account if they do not have sufficient funds. After two payment attempts, lenders will be required to re-authorize a payment method with the borrower.
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