How to Protect Yourself From Predatory Payday Loans
For financially vulnerable people who have been denied bank loans, payday loans can be the last means of raising money to pay bills and necessities. And it forces them to prepare for the predatory practice that must perpetuate debt traps in order to continue to generate profits.
Now the Consumer Financial Protection Bureau is removing rules that would protect consumers from some of these actions. Here’s how to protect yourself.
Avoid any loans with an annual interest rate higher than 36 percent
This advice comes from Lauren Saunders, deputy director of the National Consumer Advocacy Center . The CFPB reports that payday loans usually have an annual rate of 400% , although it can be much higher: “This may sound beneficial in the short term, but in the long term it will lead you into a debt trap that is much worse,” Saunders writes. by email.
Cancel automatic holds
However, if you do so and you have authorized the lender to automatically withhold your payment from your bank account, Saunders says you have the right to cancel this. “You should write a letter to the lender saying that you will ‘revoke the authorization’ for the deduction,” she says, and keep a copy of the letter. If the lender does not stop making payments, you can also ask your bank to stop making them. “Just keep in mind that canceling an automatic payment does not mean you don’t owe money, and the creditor may try to collect the debt in other ways.”
Make sure the lender is licensed
Finally, if you have taken out a loan online, check if the lender is licensed in your state. “If it’s not, the loan may be invalid,” she says. “Check with your state department of financial institutions.”
You can also visit this website for more information, including which states require lenders to provide longer term repayment plans .
What happened to the CFPB?
Back in October, the CFPB issued rules that will take effect in August 2019 on short-term loans, requiring lenders to determine whether borrowers are able to pay off their debt within 30 days, while incurring and limiting the basic living expenses. loans that can be obtained by one borrower within a certain period of time.
This was a big win for consumers, as the rule was the first of its kind to take over the $ 38.5 billion industry . At the time, CFPB director Richard Cordray said the rule would help end paycheck debt traps. “Too often, borrowers who need quick money are trapped in loans they cannot afford,” he said. “The common sense of the repayment protection rule prevents lenders from succeeding in driving borrowers into bankruptcy.”
These small advances are now at the turn. Following Cordray’s departure from his post, interim director Mick Mulvaney (who is also director of the Office of Management and Budget) announced that the agency is now revising the rule . And the CFPB has also withdrawn a lawsuit against a group of lenders who allegedly defrauded consumers by not disclosing their loans, with an annual interest rate of up to 950 percent. (Mulvaney received over $ 30,000 in payday donations from lenders in 2016.)
Lenders have already found ways to circumvent state payday loan rules. The Los Angeles Times has a detailed account of the practice some lenders use to avoid caps on loan amounts. These so-called installment loans “are typically several thousand dollars and are designed to be repaid in a year or more,” the Times reported. “The end result is a loan that can cost many times the amount borrowed.” For example, one woman interviewed by the Times took out a $ 5125 loan that was scheduled to be paid back over seven years, with nearly $ 37,000 in interest. Like payday loans, they are usually for people with bad credit who are trying to make ends meet.
It is unclear whether the CFPB rule would have thwarted this type of lending, but importantly, a portion of it would apply to all loans with an annual interest rate of more than 36 percent (for reference, the current average annual interest rate for a credit card is 16 percent).