Limiting payday loan rate to 36% may not fully protect consumers

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Several states, including Illinois as well as Nebraska, recently introduced restrictions that set the maximum interest rate at 36% on consumer loans, including payday loans.

Advocates argue that these restrictions protect consumers from getting over their heads with these traditionally expensive loans, but opponents argue these types of laws will reduce access to credit, forcing lenders to stop business at unacceptable rates, and people have nowhere to turn when they are short on cash.

New study published on Monday This appears to indicate that while these 36% rate caps may be well-intentioned, a different approach may actually have a greater impact on reducing the number of Americans falling into the so-called “trap.” debt trap where it is difficult for them to repay the loan.

Consumers are best served by rules that require lenders to deny borrowers any new loans for a 30-day period after they have taken out three consecutive payday loans. the report finds… About 90% of borrowers surveyed said they need additional motivation to avoid payday loan arrears in the future, and this system will provide this without immediately limiting access to credit.

“In our estimate, banning payday loans hurts online consumers, but rules that allow payday loans but restrict repeated borrowing can help consumers,” he says. Hunt Allcott, one of the study’s leading researchers and visiting professor of law at Harvard University.

Payday loans are easy to obtain, but difficult to pay off. In states where payday loans are allowed, borrowers can usually obtain one of these loans by logging into the lender and providing only valid ID, proof of income, and bank account. Unlike a mortgage or car loan, no physical collateral is usually required, and the amount borrowed is usually repayable after two weeks.

However, the high interest rates that are coming more than 600% per annum in some statesand the short repayment terms can make these loans expensive and difficult to repay. Research carried out The Consumer Financial Protection Bureau found that nearly one in four payday loans are re-borrowed nine or more times. In addition, it takes borrowers about five months to pay off loans, and finance costs cost them an average of $ 520. Pew Charitable Trusts Reports

Implementing a 30-day “think period” for payday loans allows consumers to access credit when they need it, but also forces them to repay the loan earlier (instead of continuing to borrow the loan), which is in line with what borrowers say what they want for themselves in the end, Alcott says.

According to Olcott, the think-over period should be at least a month because it is long enough to actually force borrowers to go through the billing cycle without getting a payday loan.

“Most people have a lot of money in their bank accounts in the first days after receiving their salary. Only for a few days after your next paycheck do you really run out of cash and need a loan to make ends meet, ”says Olcott.

It’s worth noting that Monday’s research makes several key assumptions, including that caps on consumer lending rates, including the 36% model, would effectively act as a complete ban on payday loans.

In addition, the study does not take into account the impact of moderate interest rate restrictions or regulations that encourage people to gradually repay loans that were implemented in Ohio and now canceled 2017 Rule from the Consumer Financial Protection Bureau

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