The payday loan industry is about to be upended with new rules designed to protect vulnerable borrowers from a cycle of fees that can equal an astonishing 400 annual percentage rate, or APR.
The Consumer Financial Protection Bureau today announced a proposed rule that would require lenders to determine whether borrowers can afford to pay back their loans. Lenders would also be required to “cut off repeated debit attempts that rack up fees and make it harder for consumers to get out of debt,” says the CFPB.
These tough new rules would cover payday loans, auto title loans, deposit advance products, and certain high-cost installment loans.
A payday loan is a short-term loan, often for $500 or less, that is normally due on the next payday of the borrower. When you take out a payday loan, you typically have to give lenders access to your checking account or write a post-dated check for the full balance that the lender can deposit when the loan is due.
According to the CFPB, the cost of the loan (finance charge) may range from $10 to $30 for every $100 borrowed. A typical two-week payday loan with a $15 fee per $100 borrowed equates to an annual percentage rate (APR) of almost 400 percent.
The CFPB is inviting public comments on their proposed rules, Notice of Proposed Rulemaking on Payday, Vehicle Title, and Certain High-Cost Installment Loans.