Payday lending is a bit of a racket. The loans are small and ostensibly short-term-- mainly for those strapped for cash and unable to qualify for a line of credit who need a quick cash advance before receiving their paycheck. A car breaks down, a doctor needs visiting, bills pile up; lots of things can happen that makes someone working paycheck-to-paycheck need quick money before payday. The problem is that the interest rates on these loans run as high as 582%, and can create a "trap" where people end up constantly one paycheck behind, perpetually taking out payday loans to cover their living costs as their paychecks cover the prior week's payday loan and quickly mounting interest, leaving the borrower never actually able to pay the loans off.
The Consumer Financial Protection Bureau proposed new rules for the industry late last month intending to curb this practice. The new rules would give payday lenders a choice. Either:
1. Make sure borrows will have enough to pay back the loan and cover their household costs with their next paycheck before lending, or
2. Institute a series of checks on the "trap," including cooling-off periods between loans, caps on the number of loans that can roll over, and the creation of an "off-ramp" that allows borrowers to pay off a loan without incurring additional debt.
Are these methods as effective as shutting down the borderline-usurious payday lending industry for good? No. Are they better than nothing? Sure.
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