When you’re poor you don’t have the same kind of options that other folks have when it comes to borrowing money. As a matter of fact, there really aren’t many lending options that are currently available to lower income Americans. One type of lending that has been helpful to poorer people over the years may soon wind up going away forever. The Consumer Financial Protection Bureau (CFPB) has created new rules that may prevent poor people from getting access to short term lines of credit. And these rules were created because the CFPB says it wants to get rid of “debt traps” that are caused by the payday lending industry.
About Payday Loans
The payday lending industry really started to take off in the 90s. Most folks have seen the small storefront locations that these lenders use as their base of operations. The lenders provide small dollar loans (usually for just a few hundred dollars) to their customers. The customer pays back the loan in a week or two and is charged a flat rate fee that must be paid back in addition to the money borrowed. It is typical for payday lenders to charge about $15 for every $100 a person borrows. So, if someone takes out a $200 payday loan, they must pay the lender $230 after the two week loan term is up. Pretty easy to understand, right?
The CFPB doesn’t think that process is very simple or easy to understand. In fact, they seem to believe that American consumers are so dumb that they couldn’t possibly understand and abide by those types of loan terms. That is why they have amped up their efforts to effectively eliminate the payday lending industry. They are looking to implement their proposed rules on a federal basis, so all the states have to fall in line with how the CFPB wants to regulate this industry.
One problem is, however, that individual states have already been doing a pretty good job of regulating the payday lending industry without eliminating the industry altogether. This doesn’t appear to be enough for the CFPB, though, as they have been pushing very hard to get their new rules implemented as soon as possible.
The New Rules
The CFPB wants to make lenders assess whether or not a borrower can pay back loans prior to the loan being made. They also want to make it more difficult for people to roll over old loans into new ones. If these rules become the law of the land, they will certainly shake up the payday lending industry. But that might not be a good thing after all.
We have to use critical thinking here to figure out why people take out payday loans. They do so because they need access to fast cash. Many of these people have low credit scores and/or very little access to traditional banking services. These folks have the same types of emergency expenses that everyone runs into from time to time. But without a lot of cash on hand or the ability to borrow from banks/credit card companies, they instead turn to payday lenders. The bottom line – people take out payday loans because they need to. They have no other avenues to pursue when they need emergency money. If the CFPB’s new rules drive thousands of lenders out of business we could potentially see millions of American households left with no option available to them at all when they need to take care of emergency expenses.
This is just another example of people/organizations saying they have someone’s best interest at heart, but really doing nothing more than making life more difficult for that person. Without payday lenders to turn to when hard financial times hit, poor people may wind up with nowhere else to turn than illegal (loan shark) lenders. That certainly isn’t the kind of outcome that anyone wants to see take place.