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New federal guidelines address risky aspects of payday lending

Most of our readers have probably, at one time or another, come across an advertisement for payday loans, which are typically small, short-term loans due on the borrower's next payday. The terms of these loans vary, but in many cases such loans can border on--if not cross over into--the predatory.

High interest rates, combined with the fact that many borrowers roll over their payday loan debts into new ones, can make such loans something of a black hole for borrowers. Mainstream banks are prohibited from some of the practices payday lenders use, with some states essentially banning them. Still, payday lending is very much an active industry in many states. 

New rules established by the Consumer Financial Protection Bureau, however, would put limits on payday lending, such as requiring lenders to confirm that borrowers are able to pay back the money and limiting the number of times borrowers can roll over their loans.

The impact of the rules, which could take effect as early as next year, could be dramatic, nearly halving the number of payday loans and making such loans much less profitable for lenders.

There is a political dimension to the changes, as Republicans often labeling the Consumer Financial Protection Bureau's efforts to protect consumers as overreaching, and democrats praising such efforts and calling for even more extensive protections for consumers. At this point, it isn't clear if the rules would remain standing, since they could become the subject of legal action.

In our next post, we'll take a look at payday loans in the context of bankruptcy.

Source: Consumer Financial Protection Bureau, "What is a payday loan?," Accessed June 3, 2016. 

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