In the United States, payday loans have been counted in the category of predatory lending. The reason is, the interest rate of payday loans ranges from 391% to 521% after being calculated on an annual percentage rate basis which somehow exploits the borrower. Other examples of predatory lending include credit cards, auto loans, mortgages, etc.
Nonetheless, according to the Federal Reserve research, it is stated that Americans who do not have access to credit cards or other bank loans often turn to payday lenders in times of need. There are almost 12 million Americans that apply for payday loans to resolve their short-term financial crises.
In 2019, the Federal Reserve also calculated that the lenders offered $29 billion to the borrowers and received an astonishing amount of $9 billion on top of it as payback because of the interest rate.
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How Borrowers Were Protected From Predatory Lending?
However, in 2017, a series of regulation rules were changed by the Consumer Financial Protection Bureau to protect the borrowers, The regulations forced the lenders to determine properly whether the borrower is able to afford the loan with an interest rate of 391% or not.
It is uncertain whether the regulations were implemented altogether or not. Although, the argument that consumers need protection is still in discussion. There are five changes that were originally approved in favor of the borrowers and consumers.
The predatory lenders have to verify the borrower’s income and determine thoroughly whether the borrower can afford to repay the loan after covering basic financial obligations in their income such as housing, food, clothing, transportation, etc. For this to be done authentically, the lenders must check the borrower’s credit report to determine their eligibility for the loan.
If the borrower is unable to pass the ‘Full Payment Test’ mentioned above, then the payoff option would limit the consumer from borrowing a huge amount. The limitation would be implemented according to the income of the borrower. Few other restrictions in the payoff option for the lender include:
When the borrower can’t repay the loan on the time mentioned in their contract, then the lender charges increased fees and interest for it. This is known as ‘Roll Over’.
However, the cooling-off period indicates that there must be a 30-day relief for the borrower to arrange money to repay. This rollover can only be done twice. In these 30 days, the interest and fee charges will not be increased and the borrower will not be allowed to apply for any other loan.
This regulation requires the lenders to report and mention all the details of their lending to major credit reporting bureaus. This way they can easily update the system bureaus about the repayments of the borrowers if they are being made on time or not along with any of their rollover details.
The main alternative option to protect borrowers from exploitation includes lending long-term loans that would mean less risk for consumers. This will also have an option to limit the interest rate to 28% (APR).
Another option includes having a fixed amount for as long as the payments are not cleared but there will be no delays meaning no late payments and no missed payments. This way the interest rate will not increase and can also be negotiated.
What Are Payday Loan Alternatives?
As mentioned above, an important survey suggests that 12 million American consumers apply for payday loans every year. Despite knowing the risks and warnings from several sources about the soaring cost of the system.
There are a few other ways to find debt relief and resolve financial problems without receiving payday loans. The best places to try are community agencies, churches, and private charities. Other includes:
Across the nation, a new regulation came as a relief for employees to get a chance to receive their own earned money before the paycheck is due. For instance, if an employee has worked for a week and the next scheduled paycheck is not due for another week, the employee can still ask for advance payment. This is not considered a loan and does not include interest in most cases. The money will just be deducted from the next payment.
Borrow A Short Amount From Friends Or Family
This is certainly the easiest solution to resolve your short-term financial needs without having to pay an extra amount as an interest rate. And even if you have to pay interest when you are repaying the amount, it will still not have as many obligations as a payday loan does. Also, receiving money from a close friend or family member means you will have a generous timeframe to pay off the loan. Make sure that this is just like any other business deal which should make both sides happy, but has a compassionate way of doing it. Just draw an agreement and stick to it.
There are some non-profit organizations that offer free advice and credit counseling. They will help you set up a monthly budget. Also, if you have to pay off a loan, they will help you manage your basic expenses in a way that you will be able to pay off your debt in a stable way. Some organizations also offer paid services to reduce credit card debt through strategized debt management plans.
This content was originally published here.