We have discussed how payday loans hurt your financial situation more than help in the past in this blog. And during President Obama’s last term, a bill was passed that would regulate the predatory aspects of payday loan companies. However, the Consumer Financial Protection Bureau (CFPB) has announced that they plan to rollback these regulations. The regulations were supposed to be in place in January 2018 but have been delayed. It is now even more important for consumers to understand the risks associated with payday loans.
One major aspect that the CFPB intends to rollback is the requirement for payday loan companies to verify that a consumer can pay back the loan. According to CNBC, payday loan companies charge an average annual percentage rate of 400 percent. (A credit card company generally charges 11%-23%). CNBC also states that borrowers end up taking out multiple payday loans in order to repay their original loan and end up paying an average of $520 in finance charges. Therefore, even if you are able to get out of the cycle of continually taking out payday loans to pay off previous loans, you still end up paying exorbitant fees which may total more than your original loan.
So, how do you avoid needing to take out a payday loan? The best plan is to save each month to prepare for unexpected emergencies. Even if you are only able to invest $20 into a savings account each payday, that money will gain interest and can help you make ends meet when money gets tight. If you haven’t saved money and find yourself considering a payday loan, be sure to explore all your other options first (a personal loan from a bank or family or friend, lines of credit, credit cards, etc.). And, most importantly, before borrowing money from any source, make a plan of how to repay the money borrowed and stick to it to avoid paying even more fees and getting buried in a vicious cycle of debt!