The Consumer Financial Protection Bureau releases Payday Loan report
The Consumer Financial Protection Bureau (CFPB), a consumer watchdog, released a report on the high cost of payday loans. The report stated that the borrowers are often trapped into a cycle of debt and warned of new rules targeted at lenders as well as banks were on the horizon.
Payday loans are short-term loans of $100-$500 that are used to cover one’s expenses until the borrower’s next payday. While not legal in all states, these loans have long caught the attention of consumer advocates for their interest rates and business practices.
According to the report, one of the issues with these loans is that lenders do not look to whether the borrower can afford to pay the loan back. Since the loans carry high fees and need to be repaid quickly, many consumers take out multiple loans.
An infographic published by the group showed, the average interest rate was over 300% and the average amount of days the typical user was in debt for was 200.
Consumers Union, the non-profit publisher of Consumer Reports, stated that payday loan fees are up to $17.50 for every $100 borrowed. The interest rates for such transactions are staggering: 911% for a one-week loan; 456% for a two-week loan, 212% for a one-month loan.
“Payday and deposit advance loans, while designed for short-term, emergency use, are leading many consumers into long-term, expensive burdens,” CFPB Director Richard Cordray said.
While the need for cash during an emergency situation is a real issue for some individuals, there are alternatives to these loans available.
So what are the alternatives to payday loans?
- Speak to your creditors – Negotiate a payment plan with them
- Secured credit cards – These cards are designed for people with poor credit or little credit history. Just make sure to check them out on the Better Business Bureau website and read all your paperwork regarding fees.
- Peer-to-Peer Lending – There are two major peer-to-peer lenders (Prosper and Lending Club) that offer short-term loans. Their rates are considerably less than the rates payday loans charge even for people with poor credit.
- Sell your Stuff – Sell your unwanted items on eBay, Craig’s List or a pawnshop. This will allow you to get the cash you need without having to pay interest.
- Sell your Future Payments – The rates for selling your future annuity, royalty, structured settlement or pension payments are the lowest to date. These rates are less than many lending products. Since it isn’t a loan there is no money to pay back so you can get yourself out of debt and start fresh.
Remember, do your homework by researching companies with the Better Business Bureau and reading all your paperwork.
