Pay Day Loan Rules: What You Need To Know

If you are living paycheck after paycheck and short of funds now, then payday loans might just be your best bet. Payday loans won’t require rigorous credit checks. These are loans due on the 14th day or your next paycheck.

How Payday Loans Work

Like a moth to a flame, payday loans have been a popular choice for many borrowers who have bad credit ratings who need quick cash. Fintechs have now been conscientiously disrupting the lending market by opening up payday loans even for those who have poor credit scores or are blacklisted from other financial institutions. The only catch is that you are granted quick cash for short-term repayment and at high-interest rates.   

Lending apps have become an emerging trend for those who need fast access to cash without the need to line up in offices or submit tons of documents. All you need is a mobile phone, and a couple of valid IDs and proof of employment or salary and you are good to go. 

Sounds too good to be true but approval for this online payday loan apps is fairly quick and easy. In fact, it would only take a few minutes to apply and you get approval within the day or after a few days. Processing with these new payday loan apps is relatively hassle-free and convenient as compared to other loan types in the market.

Anything that comes easy though has a hefty price to pay. The interest rates and exorbitant fees with these payday loans can strap you further and deeper in debt. In order to get approved of a loan, the borrower needs to grant access to their private data like employment and bank account information which is a risky move. The payday loan app debits the amount borrowed plus interest on payday.

What is the 2017 Payday Lending Rule?

The Consumer Financial Protection Bureau issued a rule on personal loans and other installment loans on October 5, 2017.

A notice to delay the compliance date which should be August 19, 2019, was also issued along with the plea to reconsider the mandatory underwriting provisions.

On June 6, 2019, a Delay Final Rule was issued which delays the compliance date of the 2017 Payday Lending Rule which is adjusted to November 19, 2020, and also made the necessary technical corrections applied to the existing 2017 Payday Lending Rule with the application of the Delay Final Rule.

The Payday Lending Rule mentioned applies to all covered loans including payday loans made by a lender. Loan types on Personal Money Network covered by this rule are those for family, personal, or household expenses.

Covered loans are generally those that fall under these types:

  • Short-term loans that would require quick repayment or within 45 days of loan approval or advance.
  • Long-term loans with a categorically balloon-payment type of structure.
  • Long-term loans with a cost of credit or interest equivalent to 36% APR or more.

Pulling off the Payday Loan Rule would actually help borrowers obtain more viable options for loans or credit. Many borrowers with negative credit scores fall prey to payday loans that is masked as easy access to cash but which actually leaves them choked up in debt.

The ballooning debt creates a chain of poverty and dependence on debt without really making people’s lives financially better. Pulling back this rule would actually encourage healthy and safe competition in the payday lending industry which will provide equal yet diversified credit opportunities for many borrowers of different credit standings.

The Role of the Consumer Protection Bureau and the Payday Loan Rule Design

The Consumer Protection Bureau aims to protect the industry and the borrowers from the high-interest rates accrued from these loan sharks or payday loans.

Payday loans would offer small and short-term loans to borrowers who would repay the loan on their next payday. According to the Consumer Protection Bureau, interest rates have an annual APR of 390%. Borrowers would usually take out loans for eight times or more yearly. This is equivalent to as much as 80% rolled over from one loan to another in a matter of two weeks.

Former President Barack Obama once quoted the Payday Rule as the end to what is coined as predatory lending. A rule which is designed to crack down on payday loans was proposed in 2016 which was supposed to require lenders to be able to determine whether borrowers have the capacity to pay off their payday loans. This also limits lenders to two attempts of withdrawing or debiting money from the borrowers’ respective accounts.

However, with Trump administrations, the CPB has shifted gears. Instead of the rule kicking in by January 2018, CFPB Director Mick Mulvaney had to delay the Payday Rule. This has stemmed from the fact that the bureau did not find enough evidence to support abuse or unfair practices of payday loan companies which would necessitate this ruling. 

They also said that the ruling or removing protections would affect or limit borrowers and could lead them into a howling debt trap. This is especially true or applicable to minority communities.

There has been a trend of how payday lending companies are preying on people of color draining them of their funds. There is currently a strong call for action or a national campaign to enforce and strengthen the Payday Lending Rule. 

This was originally created to protect consumers or borrowers, especially those who were affected by the Great Recession but it has turned the tables around for many people who desperately want a way out of debt.

 Payday Loan Rules are meant to protect both borrowers and lenders but it seems to have deviated direction. Knowing your options and also your ability to make repayments will help you decide whether you need to get a payday loan now or look the other way for more loans and financing options.