Tag Archive | Line of credit

Are Payday Loans really the Debt Traps they are made out to be?

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 LoansBanks Being Scrutinized By Regulators for Payday-Like 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.

Less Than Half of Americans Really Understand Bad Credit Scores

Everyone knows the importance of staying on top of their financial situation. We do all that we can to live on a reasonable budget, to pay bills on time and maybe even to save a little bit of money. One of the measures of how well we are doing financially is our credit score. Like everyone else, you probably know that it is in your best interest to have a higher credit score. But do you know the impact that a bad credit score can have on your entire life? If you are like more than 50 percent of American consumers, you may not.credit-score

It is true that credit scores can be a bit difficult to understand at times. For example, you may have up to three different FICO scores, dependent upon which of the three credit reporting agencies you choose to turn to when you are checking up on your credit score.

A new report published by the Consumer Federation of America (CFA) indicates that very few American consumers actually understand just how much their credit scores really matter. It appears that there is a fundamental lack of understanding about how credit scores are calculated and the different things that actually affect how high or low a credit score really is.

The study, which is quite enlightening, states that less than 50 percent of consumers in the United States know how costly it can be to have a bad credit score. The report also shows that people do not know that multiple credit checks can cause their credit scores to drop.

Every year the CFA releases its Annual Survey of Consumer Knowledge About Credit Scores, and this yearly report may help to explain just why so many Americans are in rough financial conditions. There are multiple sites that allow people to get free annual credit checks, but it appears that most people either aren’t aware of these sites or simply do not understand how to put the information from their credit reports to good use.

According to the study, the U.S., as a nation, has a current $800 billion in credit card debt. To top that off, our total consumer debt level is right around $25 trillion! With so much money on the line, you would expect that American consumers would be better educated about their credit scores. Sadly, though, that does not seem to be the case.

Stephen Brobeck, the executive director over at the CFA, said, “Credit reports and scores are so important to consumers that they should be trying to improve their knowledge.”

The CFA study shows that only 29 percent of people know that people with bad credit scores will likely pay up to $5,000 more on a typical car loan than someone with good credit will end up paying over the same amount of time.

It is too bad that so few people really understand what their credit score means. It is likely, however, that this lack of understanding is going to continue to cost people even more money in the years to come. And right now is simply a time when none of us can really afford to pay more than we should have to. We can all hope that people begin to take their credit scores a little more seriously in the coming year and that we all – as a nation of consumers – begin to work toward improving our credit scores, while reducing our overall level of consumer debt. If we plan on really recovering from the recent financial problems that we have all dealt with, it is high time that we all begin doing what we can to improve our financial outlook.