Proponents of consumer rights say the new payday loans policy will help low-income people and families trapped in endless debt cycles. Industry representatives argue that payday loans are an option for people facing unexpected expenses or emergencies. The rules may paralyze the industry, which according to the report accumulated several billion in revenue from fees, check out the best deals.
Here’s what you need to know about payday loans and new rules.
What are payday loans?
Payday loans usually range from 200 to 1000 USD and must be repaid when the borrower receives the next payment. On average, borrowers incur a fee of USD 15 for each USD 100 borrowed. This is equivalent to over 391% of the annual interest rate. The government may limit access to payday loans in some areas or limit the amount that people can borrow. Some countries have banned them completely, according to the national conference of legislative bodies.
What is the controversy?
It is argued that most customers who take out payday loans cannot afford them. About four out of five customers decide to take out a loan again within a month. According to this quarter, the loan is borrowed more than eight times. They are constantly getting new fees. Numerous groups have long recognized the payday loans practice as “predatory”. Some customers are trapped by loans in a harmful debt cycle – but that’s a small percentage, maybe 15%. Industry representatives explain: “We get about 4% return on investment” or “We don’t make indecent profits on people’s harm”,
What do the new rules dictate?
1) Lustration of borrowers
Lenders will need to check the borrower’s income, cost of living and major financial obligations (such as a mortgage or car). In most cases, this means downloading a credit report.
2) Special rules for loans below USD 500
Borrowers who take out loans of smaller value do not necessarily have to go through all the lustration obstacles. But these borrowers must pay at least a third of their loan before they can buy another one. It is borrowers and indebted borrowers who can also help prevent borrowing.
3) Limits on the number of loans
If the borrower takes three payday loans in the short term, lenders must cut him off from them for 30 days. In addition, unless they prove their ability to pay back the whole thing, borrowers cannot take more than one loan at a time.
4) Prevention of criminal charges
Lenders cannot continue to attempt to withdraw payments from the borrower’s account if they do not have sufficient funds. After two attempts to pay, lenders will need to re-approve the borrower’s payment method. The new rules may come into force – but this is not a foregone conclusion. They will also apply to other types of credit products than traditional loans. This includes auto loans and long-term loans related to bank payments.
What does this mean for lenders? Some borrowers may be forced to close the deal. What does this mean for consumers? If payday loans are not available in some areas, there are alternative options. These include some short-term loans offered by some Community banks or credit unions. Some employers also offer advance programs.