Payday loans can be harmful to consumers
On March 25, 2014, the director of the Consumer Financial Protection Bureau, the federal agency responsible for enforcing federal consumer laws and regulations, visited Nashville to hold a hearing about the payday lending industry. The CFPB is turning its attention to payday lenders, and considering possible regulations for the industry, given the detrimental effect that these loans can have on the financial situations of consumers in Tennessee and the rest of the U.S. Many of these lenders are guilty of abusive lending practices that cause a great deal of harm to consumers.
Abusive lending policies
When consumers take out payday loans, also called cash advances or check loans, they usually borrow small sums. The CFPB reports that most payday loans are under $500. The loans are short-term, usually due on the borrower’s next payday. Payday lenders do not assess a borrower’s ability to repay the loan the way that other lenders such as mortgage or auto lenders do. Instead, borrowers must give the lenders a post-dated check or other access to the borrower’s account so that the lender can get money from the account when the loan comes due.
The loans also have exorbitant fees associated with them. The CFPB found that the fees for a payday loan can run between $10 and $30 for each $100 a person borrows. For a two week loan with a $15 fee for each $100 borrowed, a person ends up paying the equivalent of an approximately 400 percent interest rate on the loan. In contrast, credit cards charge between 12 and 30 percent interest on balances borrowers carry.
Making finances worse
Those who take out payday loans often end up trapped in a cycle of borrowing that causes their financial situations to spiral downward. It is common for people to roll over the balances of their payday loans into new loans – along with new fees. Payday lenders benefit from borrowers’ inability to pay. Payday lenders generate about 60 percent of their fees from those who take out 12 or more payday loans per year, according to the CFPB.
Because payday lenders have direct access to borrowers’ bank accounts, they can take money when they choose – without consulting the borrowers. This can leave borrowers without money to pay for even basic necessities such as food, housing or medical care.
Bankruptcy may be an alternative
Those who rely on payday loans are often in financial crises, barely living paycheck-to-paycheck and drowning in debt. Those with serious financial burdens may want to consider bankruptcy as a means of reorganizing their finances, rather than continuing the payday loan borrowing cycle. Bankruptcy offers people a chance to discharge most of their unsecured debts and get back on their feet financially.
If you have questions about whether bankruptcy is the best option for your financial problems, speak with a board certified Tennessee bankruptcy attorney about your debt relief options.