Payday loans can be considered the easy way out when you are dealing with emergency expenses. They are fast and reliable so it makes sense that a lot of people are turning to payday lending when they are in a pinch financially.
However, going to storefront lenders without knowing the rules and regulations of payday lending would hurt your finances really badly. Before you borrow money from payday lenders, you should at least have some basic knowledge about it.
What Are Payday Loans?
Payday loans are known as cash advances and they are short-term, high-interest loans that can give you money within 24 hours. They are called “Payday” loans because there is a post-dated check given to the lender and the total amount borrowed will be withdrawn on the next payday of the borrower.
These loans have very basic requirements and it is very easy to qualify. This is also the reason why a lot of people have been relying on this type of loan, especially if they need money before their next payday.
Basic Requirements Of Storefront Lenders
If you are going to apply for a payday loan, you should know all of the basic requirements of the lenders so you can get your money immediately. Here are the common requirements required to get a payday loan:
- The borrower should be at least 18 years of age.
- An active checking account
- Proof of income
- Valid identification
Your loan application can be approved in as fast as 15 minutes and you can get the money before you even leave the premises. Usually, the lender will ask the borrower to write a check with the loan amount and the lending fee. The lender will hold on to the check until the due date of the loan. You can pay the loan directly to the lender or they can just cash in the post-dated check.
Rules And Regulations Of Payday Lending
Before you go to the storefront lenders to borrow money, let’s have a closer look at some of the basic rules and regulations of payday lending.
1. Age Restriction
You can only apply for a payday loan if you are 18 years old and above. This is to make sure that the borrower is capable of paying the loan.
2. Valid Identification
You need to provide valid identification to get a payday loan. You need to give them any proof of identity like valid IDs so they can verify your real name and personal information.
They are doing this to make sure that the borrower is not borrowing a fake name. This can lead to more problems in the future if they accidentally allowed a person with a fake name to borrow a loan.
3. Checking Account
The money will be transferred directly to the checking account and they will not give it to you in cash. The payment will also come from the same checking account or you can give them a post-dated check.
If you don’t have a checking account, it is better to get one now before you go to a storefront lender as they won’t accommodate you without it.
4. Proof Of Income
The lenders need assurance and they have to make sure that the loan will be repaid. They always ask for proof of income as it would serve as an assurance that you are capable of paying the loan.
5. Loan Limit
Payday loans have a limit and you cannot borrow a huge amount. If you want a bigger amount of money, you need to go to the banks. For payday loans, it would depend on the rules and regulations set by the state where the lender is operating.
Most states allow up to $1,000 for payday loans and there are also areas where you can borrow as much as $1,500. Since this is a short-term loan, anything higher than the amount mentioned would be very hard to repay. You have to consider the interest rate of the loan as well.
6. Interest Rate
Payday loans often have a fee of $10 to $30 for every $100 borrowed. This means that borrowing $1,000 can result in a fee of about $100 to $300. However, it is only applicable if you paid the amount within two weeks or you’ve made the payment on or before the due date.
If you talked to the lender and wished to carry over the charges, it would increase over time until you manage to pay the loan.
The Retracted Changes On The Payday Loan Rules And Regulations
In 2017, the Consumer Financial Protection Bureau made a series of regulation changes that will protect the borrowers from payday loans. This is because of the increasing number of people who are put into a debt cycle because of payday lending.
However, the Trump administration rejected these changes and they argued that the consumers don’t need protection. Because of this, the CFPB decided to remove the regulations and they initially planned to ask for public comment in June of 2020.
We listed down the changes to protect consumers that were rejected.
1. Full Payment Test
Before storefront lenders approve a loan application, they need to verify the income of the borrower. They have to assess if their income is enough to support their basic needs and they still have enough money to repay the loan. They need to check for other loans that the borrower is currently paying.
2. Principal Payoff Option
This is the rule that would limit the loan of the borrower to not more than $500 if they failed to pass the Full Payment Test.
The lender won’t be allowed to take the car title of the borrower as collateral for the loan and they will not be allowed to give a loan to a borrower who is currently paying a short-term loan.
They would have to restrict loan extensions to the borrowers who already paid about one-third of the principal amount on every extension. The lenders also need to disclose the Principal Payoff Option to the borrowers before they approve the loan.
3. Cool-Off Period
This rule was proposed to prevent the borrowers from entering a debt cycle. Most borrowers roll over the loan when they cannot pay the original loan after two weeks so this proposal aims to stop it.
In the proposal, there should be a 30-day cool off period for the borrowers who already rolled over their loan twice. It means that they can only request for another loan after 30 days.
4. Mandatory Reporting
This is a rule that would require the lenders to report the loans to the major credit reporting bureaus so they can update them as the payments are made or not made.
This is also done to make sure that the credit score of the borrowers would change and it would increase or decrease based on how they manage their loans and other payables.
Lenders would be required to offer long-term loans, which would be less risky for the borrowers. It will include an option to limit the interest to 28% or there would be fixed payments for two years with interests of not more than 36%.
As far as CFPB is concerned, all these rules and regulations would go down the drain no matter what they do. The Trump administration still thinks that everyone should be given equal opportunity to apply for loans and solve their financial worries.
Payday loans should only be a last resort if you don’t have any other solution for your financial problem. Also, you need to understand all of the rules and regulations of payday lending so you can easily manage your finances and determine if you are capable of paying it back on time or not. You should do your research and ask all the questions that you have in your mind before you apply for a payday loan.
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