Payday loans, also known as short-term loans or small dollar, are unsecured debts and are defined as a reasonably small amount of money along with a high rate of interest lent to a borrower which is to be returned under a time period of 45 days or typically before the borrower receives their next pay.
Advantages of payday loans.
Money received at glance: as soon as you are approved for the loan the cash is readily made available to you and can be withdrawn from your bank account at any moment. The speedy payment service by payday lenders is made possible due to the timely service provided by banks and building societies in countries like the UK.
Online application: Payday loans don’t require you to interact with anyone to state your purpose and need. Applying for payday loans is made even simpler by making the application process online and hence the loan can be applied for at any time of the day.
Greater amount of loan can be taken: Payday day lenders keep track records and a good track record allows you to apply for greater amount of cash. Paying back a payday loan on time ensures that if need arises for a greater sum of cash in future, they will be made available by the payday lenders due to good track record.
Disadvantages of payday loans.
Higher interest rates: In contrast to the policy of the banks and building societies, payday lenders require you to pay back the loan with higher interest rates than the interest rates of the later
Additional fees: If the time for repayment exceeds then you will be required to pay back the amount borrowed, high interest and payday loan additional fees. Therefore, it is imperative you take a payday loan only if you are sure that you can repay the loan and interest before the repayment date expires or else see the additional fees rise to an imaginable extent.
Credit ratings: For you to get the approval of getting a payday loan, the lenders are going to use the credit rating agency. If you don’t repay on time your credit rating will be affected which will ultimately affect worthiness for taking out credit in future. Companies also refuse to let people take out credit if they’ve a record of taking a lot of payday loans.
It is observed that payday lenders have higher interest rates than conventional banks and are known to have been playing a leading role in laying well planned debt traps for borrowers. The most drastically effected may be the low-income community who just borrow money to fulfill normal recurring responsibilities. For this reason, the Consumer Financial Protection Bureau (CFPB) has established new regulations with the sole purpose of making sure the borrowers can repay the loan.
The New Regulations.
The new rule will commence from 2019 and focuses on ‘the full repayment test’. Fundamentally the test is designed to analyze if the borrower will be able to repay the money lent to them within a fixed period. The rule will be applicable on both short-term loans which require money to be returned within a few weeks and long-term loans which cost more than 36% per annum and also those which let the lenders withdraw money from the borrower’s account.
The new rules and regulations also protect the borrower’s bank account by restricting payday lenders from withdrawing money from their accounts if prior attempts (at minimum two) at receiving the re-payment has not been successful. This also limits the fees and the number of times loans can be rolled over. The rules are applicable on payday loans, auto title loans, deposit advance products and loans with balloon payments with the exception of short-term loans under $500.
Pros of the new regulations.
- Borrowers are protected from a crumpling debt cycle.
- Consumers will be able to borrow money from only those lenders who will follow the new regulations
- Voters feel at ease with opting for lenders who follow strict criteria
- The new criteria makes it difficult for lenders to avoid the law
- It keeps in check the number of times a loan can be rolled over limits the effective APR
- Excessive overdraft charges for borrowers will be eradicated by preventing multiple attempts to withdraw from bank accounts
Cons of the new regulations.
- The authority given CFPB by the Congress is exceeded by the proposal as pointed out by notable advocates and will be contingent to expensive lawsuits
- Payday loans with interest rates of 300% or more steer clear from the conditions of the new rules
- The new rules avert banks and credit unions from entering the market with lower-cost loans.
- The new rules might prevent consumer access to credit, forcing them to search for other possibilities
- The new regulations will cause credit dessert by forcing most payday lenders out of business and creating unemployment
- Limiting the borrowers by removing their ability to roll over loans will only make their conditions worse.
Conclusion.
The topic of payday lending is only a very sensitive one and hence any efforts to regulate the industry makes it worse. The perspective of payday lenders is that they provide a needed service while being accused of trapping the consumers while consumers see the industry as loan sharks.
Currently the Trump administration is focused on rolling back business regulations and has not weighed in on the new CFPB rules.
