By Jocelyn Baird, NextAdvisor.com
It's no secret that the payday loan industry is rife with predatory payday lenders. Even lenders that aren't inherently predatory still often use practices which leave borrowers stuck in a seemingly endless cycle of debt. This is a big deal, considering more than 12 million people in the U.S. take advantage of payday loans every year. According to a 2013 study done by the Pew Research Center, the average payday loan borrower pays a shocking $520 in interest to borrow $375. People turn to payday loans when they feel as if there are no other options, and what seems like an easy way to get desperately needed cash immediately often turns into a crippling debt. Fortunately for borrowers across the country, many states are trying to take action and crack down on predatory payday lenders. At the forefront is Texas, a state with few regulations and a thriving payday loan industry.
How are states like Texas cracking down?
At present, 36 states allow some form of payday lending. Some states, like Colorado, have strict regulations, but many don't. Pew's study found that 72 percent of payday loan borrowers want more regulation across the board, and a majority (81 percent) want more time to repay loans. Most payday loans are structured to require a lump-sum repayment in a short period of time. Borrowers who can't make the lump-sum payment have the option to refinance, but at a cost, which is how the debt cycle begins. Predatory payday lenders profit off of borrowers' inability to pay the lump sum on time. One potential solution favored by many is installment payments, which would enable borrowers to repay the loan in a series of payments over time.
Currently, Texas legislators are considering three bills that would go a long way toward protecting its residents from predatory payday lenders. These bills, if passed, would put a limit on how often an unpaid loan can roll over or be refinanced (three times), make lenders ensure that a customer pays down the principle amount by at least 25 percent each time the loan is refinanced and, finally, create a state database to track lending. The database is something that other states have proposed, and it mainly affects brick-and-mortar lenders.
California is also working to crack down on predatory payday lenders online, seeking to prohibit lenders from gaining access to borrowers' bank accounts. The ability to take money straight from a bank account puts borrowers at risk of being caught between a high interest loan they can't repay and overdraft fees when the lender tries to take the money from their account.
Is anything being done on a national level?
One of the biggest problems when it comes to fighting predatory payday lenders is that if one state makes it difficult for a service to operate, it can easily pick up and move to another. This is because states vary so much in their approach to regulation. Fortunately for borrowers across the country, the Consumer Financial Protection Bureau has recently proposed national regulations to help curb predatory lending practices. Some of these include requiring lenders to take steps to ensure borrowers can repay their loans, by way of setting rates and terms that are based on the borrower's actual ability to make payments, and restricting lenders from attempting to collect payments from individuals' bank accounts.
What do crackdowns on predatory payday lenders mean for me?
Obviously, if you are someone who has ever relied on a payday loan or considered one, more regulations at state and national levels are going to benefit you. The aim of all of these regulations is to prevent predatory payday lenders from taking advantage of the financially vulnerable people who are more apt to use their products. Micro loans have the potential to be beneficial, if regulated properly. Lower interest rates and a limitation on how often loans can roll over would enable borrowers to repay them in a timely fashion and not sink further into a financial hole. However, many payday loan services count on the money made from people stuck in the debt cycle and aren't going to take kindly to government efforts to stop them. That's why it's important that both brick-and-mortar and online lenders are targeted with these regulations.
You can learn more about payday loan services by following our payday loan blog.
This blog post originally appeared on NextAdvisor.com.