Millions of Borrowers Facing Crushing Loan Costs
If you’ve ever had to take out a payday loan, you know how expensive they can be. A loan for only a few hundred bucks could easily end up costing a borrower hundreds – or even over one thousand – dollars more in interest payments. Believe it or not, there are actually payday lenders that legally charge annual percentage rates of more than 1,000 percent.
How can this be? Welcome to the world of payday loans – an industry plagued by problems, not the least of which are loose regulations and weak enforcement. Payday loans leave millions of vulnerable Americans, many of whom are already living paycheck to paycheck, in a financially devastating cycle of debt that is nearly impossible to get out of. Luckily, change may be on the horizon. The Consumer Financial Protection Bureau (CFPB) has proposed a new set of federal standards for regulating the payday loan industry, which are currently only subject to regulation at the state level.
Each year in the United States, approximately 12 million people spend more than $7 billion in interest to borrow a total of $50 billion. The average borrower uses these loans to pay for living essentials like rent, utilities, food, and other day-to-day expenses. While these loans become due after two weeks, sky high interest rates often make it impossible for borrowers to pay them back in full, causing them to have to renew the loan. This results in even more interest and quickly entraps the borrower in a difficult to break cycle of ever-growing debt. The longer the lender flips the loan, the more money they will be owed. Knowing this, the CFPB has stepped in to help reduce the debt trap cycle by more closely regulating what payday lenders can and cannot do when extending a loan to a borrower.
Colorado has already taken action to protect borrowers. A law passed in 2010 replaced traditional two-week payday loans with six-month installment loans that cannot exceed $500. The maximum APR on these loans is 45 percent, which is almost 66 percent lower than the average rate. So far, this action has dramatically reduced defaults on payday loans and even allows most borrowers to pay off their loans early.
It will still take time before these changes are made on a national level, but for now it’s a start.
Atlas Consumer Law offers legal guidance and support to those struggling with debt. To schedule a meeting with a Chicago consumer attorney on our team, please call our office at (312) 313-1613.