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If you need the cash quickly, make sure that a payday loan is really your last resort. Cash strapped consumers may have more options than they realize.
The Consumer Financial Protection Bureau is to propose According to the agency, new rules to restrict payday lending practices can lead borrowers into long-term “debt traps”.
The protections would cover products such as payday and other short-term loans, auto title loans, and some high-cost installment loans. Rates on these products, he says, can reach 390% or even more.
“Too many borrowers looking for a short-term cash flow solution are struggling with loans they cannot afford and are going into debt over the long term,” said CFPB Director Richard Cordray, in a press release. “By putting in place traditional and common sense lending standards, our proposal would prevent lenders from succeeding by failing borrowers.”
Among the protections of the proposal, lenders should perform an initial ‘full payment’ test to determine whether borrowers will be able to pay off the loan without compromising other financial obligations and without needing to re-borrow (a cycle that accumulates fees and interest, making it harder to dig).
Borrowers who do not meet these requirements would have access to alternatives, including an option to repay the principal on a small, short-term loan or less risky long-term loans.
The CFPB’s proposal would also reduce the ability of lenders to tap into a borrower’s bank account to collect payment, which could trigger overdraft fees or cause the bank to close that account. Lenders would be required to notify the borrower in writing in advance, and would be limited to two failed debit attempts before returning to the borrower for re-authorization.
However, the implementation of the rules as they are currently proposed is far from certain.
“Today’s proposal, along with past regulatory measures, will make it harder for banks to meet the needs of the roughly 50 million consumers who access a variety of small dollar bank and non-bank lending products each year.” Virginia O’Neill, senior vice president of the American Bankers Association’s Center for Regulatory Compliance, said in a statement.
The Community Financial Services Association of America – an industry group for payday lenders and low dollar lenders – called the proposed rule a “staggering blow” that will cut consumers’ access to credit.
Consumers who turn to payday loans do not have access to opportunities that middle-class consumers could exploit, such as opening a home equity loan or borrowing from a retirement account, said Greg McBride, Chief Financial Analyst at Bankrate.com. Many have limited access to credit or do not have a bank account.
“People who have payday loans don’t have these alternatives,” he said.
But there are still options to consider first, said Bruce McClary, spokesperson for the National Foundation for Credit Counseling.
“Never be in a rush to borrow money,” he said. “Nine times out of 10, you’ll end up getting a bad deal.”
First consideration: can you avoid borrowing, period? Selling clothes or household items might be better than a small loan, McClary said.
If you need to borrow, first check out your credit rating on one of the many sites that offer free access. Banks and credit unions may offer small, short-term loans with more competitive rates, but many payday loan customers don’t compare to see if they might qualify, he said.
“This assumption is an expensive assumption,” McClary said. “Don’t make a decision without knowing where you stand.”
Your employer may offer an interest-free advance on your salary, but weigh the risks.
“If you get in a hock with the boss, it’s probably not a great place to go from a career standpoint,” McBride said. If you live from paycheck to paycheck, this advance is also likely to catch up with you for future bills.
As an alternative, there are several apps that can also help you increase your salary, said Gerri Detweiler, head of market education at Nav, a site that helps business owners manage their credit. Even.com helps balance unequal wages, she said, offering interest-free cash advances when your pay is below average. (Users pay off the advance on their next check higher than normal; using the app costs $ 3 per week after a 30-day trial.)
There is also ActiveHours.com, which gives users quick access to their salary based on the hours they have already worked. (The service debits your bank account on your next payday to recover the amount you advanced. Users can decide how much to pay, the site notes, “based on what you think is right.)
“If all other options have failed and you have to turn to a payday lender, make sure you know the laws in your state,” McClary said.
Regulations are “all over the map,” he said, and it’s important to know what kind of policies and rates you might be facing for in-person and online borrowing. Check the lender in the CFPB complaints database.
Going forward, take steps to avoid needing faster cash down the line.
“Almost 30% of Americans have no emergency savings at all,” McBride said. “Every little bit that you can put into a savings account acts like a buffer.”