Most people have months where they need help making ends meet. An unexpected car repair or medical bill results in pulling out a credit card or seeking a bank loan. Some consumers, however, turn to payday loan companies for help. Payday loan amounts vary depending on maximums set by the 27 states that allow this form of lending. Typically, the loans are between $100 and $1,000 with an average loan term of two weeks. There’s generally no credit check, making payday loans easy to get. The drawback is that these loans come at steep price—on average 400% in interest per year.
“But the loan is only for two weeks, not a year—right?”
Unfortunately, many consumers must take out additional payday loans to pay the interest on the original debt, creating a debt cycle that can continue until the borrower is forced to file for bankruptcy. Payday loan debt is currently the third leading cause of bankruptcy following medical and credit card debt.
To safeguard borrowers, the Consumer Financial Protection Bureau recently proposed new regulations for payday loan companies:
- All loan companies must make sure prospective borrowers have the ability to pay the money back.
- Payday lenders must offer manageable repayment terms.
- Payday lenders can’t issue more than six loans a year to any single borrower.
- Payday lenders must provide three days’ notice before withdrawing funds from a borrower’s bank account.
- The number of withdrawal attempts must be limited to avoid triggering multiple overdraft fees, as well as returned checks that can harm a consumer’s credit rating.
- Loan amounts cannot exceed $500 and interest rates must be capped at 28%.