36% payday loan rate caps may not fully protect consumers

Several states, including Illinois and Nebraska, recently implemented restrictions capping interest rates at 36% on consumer loans, including payday loans.

Proponents claim these restrictions prevent consumers from gaining the upper hand with these traditionally expensive loans, but opponents argue that these types of laws will reduce access to credit by forcing lenders to close their doors with unsustainable rates, leaving people who to turn to when you’re strapped for cash.

New research published Monday seems to indicate that while these 36% rate caps may be well-intentioned, a different approach could actually have a bigger impact on reducing the number of Americans who find themselves caught in a so-called “Debt trap” where they have trouble repaying the loan.

Consumers may be better served by rules requiring lenders to deny borrowers all new loans for a period of 30 days after taking out three consecutive payday loans, the report finds. About 90% of borrowers surveyed said they wanted extra motivation to avoid getting into debt on payday loans in the future, and this system would provide that without immediately limiting access to credit.

“In our opinion, banning payday lending hurts consumers on the net, but regulations that allow payday lending, but limit repeat borrowing, can help consumers,” says Hunt Allcott, one of the study’s principal investigators and visiting professor of law at Harvard University.

Payday loans can be easy to obtain, but difficult to repay. In states that allow payday loans, borrowers can usually take out one of these loans by going to a lender and simply providing valid ID, proof of income, and a bank account. Unlike a mortgage or car loan, no physical collateral is usually required and the borrowed amount is usually due two weeks later.

Yet high interest rates, which exceed 600% of the APR in some states, and short lead times can make these loans expensive and difficult to repay. The research carried out by the The Consumer Financial Protection Bureau found that nearly one in four payday loans are borrowed nine or more times. In addition, it takes borrowers about five months to repay the loans and costs them an average of $ 520 in finance charges, Pew Charitable Trusts reports.

Putting in place a 30-day “cooling off period” for payday loans allows consumers to access credit when they need it, but it also forces them to repay the loan sooner (rather than paying off the loan sooner). continue to borrow the loan), which is in line with what borrowers are doing. say they want for themselves in the long run, Allcott says.

The cooling off period should be at least a month because it is long enough to force borrowers into a payroll cycle without getting a payday loan, Allcott says.

“Most people, within days of their payment, have a lot of money in their bank account. It’s only a few days after your next paycheck that you run out of money and need money. a loan to make ends meet, ”Allcott says.

It should be noted that Monday’s research makes several key assumptions, including that rate caps on consumer loans, including the 36% model, will effectively act as a total ban on payday lending.

In addition, the research does not take into account the effect of moderate interest rate caps or rules that encourage people to gradually repay loans, which have been implemented in the past. Ohio and now canceled Consumer Financial Protection Bureau Rule of 2017.

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