This is an example of intervention by government power that’s actually trying to help downtrodden people. The role of consumer debt in society is often to weaken people and make it more difficult for them to fight against the corrupt people at the top with power.
The U.S. should use its post offices to provide basic banking services to communities to diminish the role of horrible payday lenders. The government should also cap consumer interest rates at 15 percent, as credit unions did in the early 1980s. Usury would have a much smaller role in a healthier society.
Today, the Consumer Financial Protection Bureau (CFPB) took the first step toward ending the debt trap by finalizing new consumer protections for shorter-term loans where consumers must repay all or most of the debt at once including payday and auto title loans, and longer-term loans with balloon payments.
The Debt Trap Harms Consumers
Payday loans, which often carry an annual interest rate of over 300%, are unaffordable and ultimately trap consumers in a cycle of debt where consumers roll over loans because they are unable to repay them. Lenders make money even if the loan is never successfully paid back because of high interest rates and fees—the debt trap. Financially vulnerable communities and communities of color are particularly harmed. Almost 70% of borrowers take out a second loan within a month, and one in five borrowers take out 10 loans or more consecutively. These borrowers taking out more than 10 loans a year are stuck in the debt trap and generated 75% of the payday loan fees in the CFPB’s research.
Auto title loans feature many of the same problems as payday loans and the CFPB found that 1 in 5 short term title loans ended up with borrowers losing their vehicle for failure to repay.
The New Rule is a First Step to Addressing the Harms of the Debt Trap
The CFPB’s new rule addresses some of the worst excesses of these loans, in states that allow them, by requiring lenders to establish a borrower’s ability to repay the loan before making the loan.
“The rule is an important first step and will benefit some consumers who need relief the most, but a great deal of work is still needed to ensure that American families are no longer ensnared in the debt trap of high interest, abusive loans,” noted Michael Best, Director of Advocacy Outreach at Consumer Federation of America.
Consumers will be pleased to see the rule as, in a recent poll, 73% of respondents supported requiring lenders to check a borrower’s ability to pay before making a loan.