The Consumer Financial Protection Bureau (CFPB) refers to a finalized new rule as “common sense” protections that are designed to stop “payday debt traps” from wiping out a consumer’s bank account. Lenders are now required to determine upfront whether people can afford to repay their loans.
Payday loans require consumers to repay all or most of the debt at once. These type of loans also encompass auto title loans, deposit advance products, and longer-term loans with balloon payments. The CFPB found that many people who take out these loans end up repeatedly paying high fees after “rolling over” the debt. The new rule also curtails lenders’ repeated attempts to debit payments from a borrower’s bank account, a practice that racks up fees and can lead to account closure.
“The CFPB’s new rule puts a stop to the payday debt traps that have plagued communities across the country,” said CFPB Director Richard Cordray. “Too often, borrowers who need quick cash end up trapped in loans they can’t afford. The rule’s common sense ability-to-repay protections prevent lenders from succeeding by setting up borrowers to fail.”
Payday loans normally involve small-dollar amounts and are due in full by the borrower’s next paycheck, usually two or four weeks. They are expensive, with charges that equate to annual percentage rates of over 300 percent or even higher.