WHAT IS PAYDAY LOAN?
A payday loan (also called a payday advance, salary loan, payroll loan, small dollar loan, short term, or cash advance loan) is a small, short-term unsecured loan, "regardless of whether repayment of loans is linked to a borrower's payday."- Wikipedia
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The new formulated law from America's the Consumer Financial Protection Bureau requires payday loan companies to put in place a measure to determine whether or not they are likely to be paid back before a loan is issued to a customer.
This law was formulated after a research by CFDB proved that over 16,000 payday loan companies make their profit from customers are unable to payback their loans at the end of the stipulated time.
“These protections bring needed reform to a market where far too often lenders have succeeded by setting up borrowers to fail,” CFPB director Richard Cordray said on a call to reporters. “The principle that lenders must actually evaluate the borrower’s chances of success before making a loan is just plain common sense.”
Payday lenders would eventually be put out of business when other players like fintech, credit union etc finally come into play.
WHAT THEN HAPPEN TO LOW INCOME EARNERS?
As of now, the payday loan industry gets around $7 billion in fees every year from 12 million borrowers. So this new law may likely cripple the profit source.
“The CFPB’s misguided rule will only serve to cut off their access to vital credit when they need it the most,” said Dennis Shaul, CEO of the Community Financial Services Administration of America, a payday loan interest group in a press release.
This point is debatable, and Cordray’s remarks pushed back on this idea. “If a borrower living paycheck to paycheck needs a payday loan to cover basic expenses or to recover from a large expense or drop in income, they will probably face the same cash shortfall when they get their next paycheck,” he said. “Only now, they have the added cost of loan fees or interest.”
But what I feel is other solutions put in place as alternatives would be able to bridge the gap by providing this needed credit at a relatively cheaper cost.
Credit unions and banks may see an opportunity
On the call to reporters, Cordray said that the bureau has “no intention of disrupting lending by community banks and credit unions. They have found effective ways to make small-dollar loans that consumers are able to repay without high rates of failure.” The credit union industry welcomed the narrowing of the rule to exclude their activities, and the praise.
“The rule will allow those who already offer payday alternative loan programs to double down,” a spokesperson for the National Association for Federally-insured Credit Unions told Yahoo Finance. “For credit unions not offering programs, the rule gives them an avenue to develop a program and take best practices from those who are already doing it well.”
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But according to reports, the Consumer Financial Protection Bureau has the backing of related agencies that are pushing for credit unions to take a larger role in filling the vacuum that these payday lenders will doubtless leave. This is because the Comptroller of Currency also is also pushing for credit agencies to get involved.
“The OCC continues to encourage national banks and federal savings associations (collectively, banks) to offer responsible products that meet the short-term, small-dollar credit needs of consumers,” the agency said in a press release.
There is no doubt the business of payday lenders would soon hit an all time low, because with services like ActiveHours emerging where users are allowed to withdraw cash the moment they earn it, no one would want to take up loans with high interest rates anymore.