What is the difference between smoking and payday loans? Smoking can be a ‘death trap.’ Payday loans can be a ‘debt trap.’ Payday loans have high-interest rates.
The federal government wants to make it harder for lenders to give payday loans. They will put the burden on the lender. The lender will have to see if the borrower has the income to pay back the loan. New rules will limit how many times a borrower can ”roll over” a loan.
The nation has not found a way to lend money to lower-income people at moderate interest rates. Payday lenders fill the gap.
The big banks have too many costs and rules to service small loans. Pawnbrokers can hold property in exchange for loans. Check-cashers will cash checks for a fee, but do not make loans.
The interest rate on payday loans is too high. It is usually about 15 percent a week. For every $100 borrowed, the borrower pays $115 back. That is not too high if the person pays the loan back in a week.
But that is not how the payday loan industry makes money. The industry wants borrowers to pay back only part of what they owe. Then the borrower takes a new loan to pay off the old loan. These are “roll-over” loans that keep a person in debt. The interest rate adds up to staggering numbers.
Many agree the new rules will harm the payday loan industry. Consumer advocates think this is a good thing for borrowers. Google will stop running payday loan ads.
Now the states make decisions about regulating the industry. Some states banned them. Other states limited interest rates and imposed other restriction. This caused some lenders to move to Indian Reservations and the Internet. They did it to avoid state regulations.
No matter the rules, borrowers will still need money now and then to pay bills.
Source: The New York Times June 2, 2016