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Consumer Financial Protection Bureau Wants Payday Loan Feedback

This article was written by in Consumer. 8 comments.

While the mainstream financial industry has faced a dizzying array of government and quasi-government regulations through most of the last one hundred years, non-bank financial products have, for the most part, evaded regulations. Catering to lower-income communities, payday loan storefronts and check cashing establishments have managed to justify their business models. The more desperate you are to pay your electricity bills and your rent before your power is turned off and you’re evicted, the more likely you are to willfully ignore the fact that the companies helping you are taking advantage of you in ways that a traditional bank would never be allowed to do.

The Consumer Financial Protection Bureau (CFPB) is now charged with recommending new regulations that go beyond retail banks, thrifts, investment banks, and credit unions into the murky world of non-bank financial products.

If you compare a short-term payday loan with a loan from a bank, you might see that the payday loan’s equivalent interest rate (APR) is 450% or even higher. Mortgages tend to be 3% to 7%, business and personal loans could be 5% to 10%, and credit cards are 10% to 20% unless you default. Anything higher, and the loan might be considered usurious. So how do payday lenders get away with charging 450% or more?

Well, these lenders frame what they charge as a flat or sliding fee, not interest. The loans are typically due in two weeks, the expected arrival of your next paycheck. It might not be fair to compare these fees with interest rates, because the borrower doesn’t hold onto the loan for a long time.

Or does he? There’s some evidence suggesting payday loans create a cycle; rather than paying off the loan when the next paycheck arrives, lenders offer an enticing deal to encourage borrowers to begin the next loan. The two-week cycle repeats.

The CFPB wants to hear from people who have had experiences with payday lenders. In order to get a good grasp on how non-bank financial products can and should be regulated, the organization is seeking comments from the public. What have been your experiences with payday loans? Feel free to share here on Consumerism Commentary, or tell the CFPB your story directly.

Photo: bigburpsx3

Updated March 7, 2012 and originally published January 24, 2012.

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About the author

Luke Landes is the founder of Consumerism Commentary. He has been blogging and writing for the internet since 1995 and has been building online communities since 1991. Find out more about Luke Landes and follow him on Twitter. View all articles by .

{ 8 comments… read them below or add one }

avatar 1 Donna Freedman

This industry was No. 1 in Liz Weston’s recent column, “5 businesses that rip off the poor.” If you’re in the position of needing the services of a payday lender, please first try to establish a credit union relationship. Some credit unions offer “payday loan alternative” lending. While you’re there, ask for someone to help you learn about budgeting — some credit unions offer that service, too.

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avatar 2 Anonymous

This sounds like a good idea to me. Paying an APR over 30% is just usury [and usually direct at those that can least afford to pay such rates].

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avatar 3 Anonymous

I have never needed a payday loan but the last overdraft I had, $30 for 6 days, worked out to be 82,563% APR. I blogged about it at the time.

If you make one mistake the banks sock you with far bigger APR loans than payday loan companies.

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avatar 4 wylerassociate

i never had experience with payday loans but this industry is a racket who prey and ravage low income families. They should be regulated.

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avatar 5 wjmenke

It is very important for the consumer division to improve this area of lending. The rates charged are ridiculous and will bankrupt most people. You can get better deals from your local loan shark. Please bring strindgent rules to this area of lending!

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avatar 6 lynn

The state I live in does not allow these sharks to ser up shop. I did a mystery shop at one in the south and I have to say I came away absolutely depressed and feeling angry they are allowed. I have never needed one – well I have, but never got one- but I feel for anyone who falls in the pit.

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avatar 7 lynn

I’ve been thinking about this for a couple of days. In the past many people were sent to prison for charging high interest rates. (There was no proof of the broken legs when they couldn’t pay up) Because paperwork is filled out, it’s currently legal to charge so much for this service. Not to mention the banks and credit cards. I’ve ‘heard’ some people pay 29% interest on a credit card. Compounded daily.

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avatar 8 qixx

I think the real solution is not regulation but to find a way to make these payday loans less desirable. Perhaps the local loan shark might start soliciting business outside these places advertising the much better rates and fees. Maybe make a law that anyone caught using such a loan can be stoned or beat for each loan. Perhaps shame might work. Start taking pictures of the people leaving these shops and setup a wall of shame. If all else fails we could always try education for the people that go in.

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