The job losses induced by COVID-19 are a catastrophic development for millions of Americans who could the least afford it. Between soaring health care costs, the lack of a safety net and now unemployment, these are desperate times for many people.
And it is not inconceivable that during this period some fall into the trap of the personal loan. Fortunately, the payday loan industry – lenders who lend to financially vulnerable consumers while charging huge, often unaffordable fees and interest rates – has been in decline for some time now.
Alphabet Inc (NASDAQ: GOOG) (NASDAQ: GOOGL) recently announced he was banning payday lenders from his Google Play app store. And Utah, the state where much of the payday loan industry is located, discovered that one in four payday lenders had closed over the past four years.
In an effort to crush payday loans once and for all, a group of bipartisan lawmakers have announced plans to introduce legislation that would expand consumer protection by capping interest rates on payday loans, the securities of car and installment loans for all Americans. . The bill, the Fair Credit for Veterans and Consumers Act, will build on the Military Loans Act of 2006, which capped interest rates on active-duty military loans at 36 %.
For the context, the Saint-Louis Fed has found calculated the APR on a typical payday loan at 391%.
“It’s hard to imagine who would want to take out a loan with an interest rate of 150 or 200% per year”, Representative Glenn Grothman, R-Wis. noted. “There is no way that is in anyone’s best interests, and taking advantage of people who are either in dire straits or more likely simply financially illiterate is immoral.”
Who is the prey
The payday loan industry has come under much more scrutiny in recent years, as new regulators like the Consumer Financial Protection Bureau, associated with the rise of alternative lenders, have put in place. light predatory practice (HBO’s Last Week Tonight even did a 16 minute segment on it in 2014). But that hasn’t stopped all consumers from borrowing.
A recent CNBC / Morning Consult poll found that 26% of Millennials and Gen Xers had taken out a payday loan in the past two years, while 15% of Gen Z and Baby Boomers said they had. And the problem is not limited to America. In Australia, 30,000 payday loans are taken out per week, the amount borrowed is expected to exceed $ 1.7 billion by the end of the year.
Some states have taken matters into their own hands. California recently enacted a bill that prevented lenders from charging more than 36% on consumer loans of $ 2,500 to $ 10,000. Ohio capped auto loan interest rates at 28% in April. Grothman also said the federal bill would not replace state law.
Advocates of the industry argue that the cap on payday loans will significantly hamper the ability of cash-strapped consumers to obtain short-term loans.
Rather than resorting to a payday lender, consumers in need should seek out services that allow them to gain better credit. A growing list of modern online lenders offer consumers more options than ever to access cash if they need it.
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