Nearly four years ago, the Consumer Financial Protection Bureau (CFPB) proposed a new rule that would have required underwriting in the payday loan industry. In other words, the lenders who traditionally make the highest cost loans to the people at the greatest risk of not being able to pay them off on schedule would have been required to assess the borrower’s ability to repay before making a loan. But, the industry fought hard, and the rule issued in 2017 never took effect. Now, the CFPB is expected to issue a new rule that will eliminate the requirement.
On the surface, including an assessment of ability to pay in the process seems like common sense. You might expect that lenders would want to ensure that the loans they made would be repaid in a timely manner. But, the payday lender business model relies on borrowers having trouble repaying their loans. Removing the requirement will free payday lenders to continue encouraging repetitive borrowing–a system that puts many people further and further behind over time.
Back in 2013, the CFPB issued a white paper examining the use of payday loans in the United States. Data showed that the median number of payday loans a borrower took out in a 12-month period was 10. The median annual days of indebtedness was 199, meaning that the median payday loan borrower had payday loan debt for more than half the year. 43% of payday loan dollars advanced went to borrowers who took out 11-19 payday loans during the year, and the average payday loan borrower paid $574 in fees.
It’s important to note that payday loans are typically small. The median loan amount in the CFPB study was about $350, meaning that the fees associated with the cycle of reborrowing were often considerably more than the amount borrowed.
California law provides some protection, meaning that California payday loan borrowers may pay a bit less than the average. In California, payday loans are capped at $300, and the maximum fee allowed is $45. But, remember that the $45 fee–a 15% charge on a $300 loan–may cover a loan period as short as a week or two. That 15% charge for a short-term loan typically translates into an annual percentage rate (APR) of well over 300%. And the legal maximum APR is much higher.
In 2019, California limited the interest rate on consumer loans between $2,500 and $10,000 to 36% per year, but the cap doesn’t apply to smaller loans.
Why Do Payday Loans Trap So Many Borrowers?
In theory, a payday loan is a way to cover a shortfall or an unexpected expense like a car repair. If you have an urgent need and payday is still a week away, it may seem well worth your while to pay $45 to fill that gap. The problem is that most people who need to borrow a few hundred dollars under this type of circumstances are living on a tight budget. That means that when the week passes and the paycheck shows up, those funds are likely already earmarked for something else. Often, that leaves the borrower with a tough choice: pay another fee and borrow again, or skip paying another bill to pay off the loan.
One option results in another round of loan fees; the other likely results in late fees and additional interest. Either way, funds are short again–either immediately or in the near future. Getting back on track can be especially difficult given that the average payday loan borrower in the CFPB report earned less than $27,000/year. 68% earned $30,000/year or less.
What Happens if You Can’t Pay?
California doesn’t have a cooling off period, so payday lenders will usually encourage borrowers who remain short on cash to pay off their loans and “reborrow.” That prevents the short-term collapse the additional few hundred dollars keeps at bay, but paying that $15/$100 over and over again chips away at the budget, moving many borrowers in the wrong direction.
The payday loan process also makes many borrowers feel that they have to prioritize the loan. Payday lenders typically take a post-dated check when you borrow from them, so they don’t have to wait for you to pay. When the due date rolls around, they can simply deposit the check. Some even include a provision in their agreements that you can’t discharge the debt in bankruptcy.
But, in fact, payday loans generally are dischargeable in bankruptcy, regardless of what the lender may try to tell you. And, if you file for bankruptcy and an automatic stay is entered, creditors are prohibited from taking any collection action while the stay is in effect. That includes depositing a post-dated check you provided as a means of paying the debt.
There are some qualifications, though. For instance, a debt generally isn’t dischargeable if the lender successfully argues that you knew you were going to file bankruptcy and never had any intention of paying back the loan. That’s especially true if you took out the loan less than 90 days before filing. So, it’s to your advantage to discuss your situation with an experienced Los Angeles bankruptcy attorney before you make any decisions.
If you’re caught in the payday loan trap and wondering whether bankruptcy might be the right solution for you, call 877-439-9717 right now. Or, if you prefer, fill out the contact form on this page. The initial consultation is always free and there’s no obligation.