How Payday Loan Regulations Affect the Industry and Its Customers
The payday loan industry has always been politically contentious, and criticisms tend to increase during economic downturns. Perhaps paradoxically, this is also the time when there is a substantial increase in the use of alternative financial systems. For example, the use of payday loans increased substantially during the fiscal year 2015 even though there was an official recovery taking place during the year. Advocates say that this is an effective method to secure quick access to emergency cash when there are few other options available. However, this option is not universally available, which can make it difficult for people living in areas with local regulations that prohibit this activity. The application and loan approval process is also subjected to federal regulations.
How Is the Payday Loan Industry Regulated by the Government?
These loans are regulated under the Truth in Lending Act, which requires the lender to provide certain information to the borrower. This includes finance charges, the APR and other details. These protections boost consumer confidence in the payday loan industry. These loans don’t require collateral, and they are classified as unsecured loans. Many students and low-income borrowers use them simply because can be repaid during the next pay period. Other restrictions may be determined by the state or city, and this is why the terms are often different from one region to another. There may be a maximum cap on the total amount of the loan, for example. Other regulations can affect the repayment period, income constraints and the number of loans approved within a certain period of time.
Why Do Borrowers Continue to Use Payday Loans?
The widespread use of the services provided by the payday loan industry does indicate that this is a popular option for people struggling with financial difficulties. There are many different emergency situations that can happen at any time, so it is important for people to have a back-up plan in the event of any unexpected situation. For example, utility rates are often variable, and the prices can spike during certain times of the year. When this happens, it can cause a sudden emergency if too many other bills are also due. Unlike traditional lenders, there is no restriction on the way that individuals can use a payday loan. This money can be used to fix a broken car, pay some bills, buy groceries or purchase other necessities. Bank loans can come with various stipulations, and there are none of the drawbacks that often come with installment loans.
The drawbacks of the payday loan system are arguably offset by other factors. This option is widely advertised as a last resort, and borrowers must understand the terms before signing the contract. Consumers often say that the convenience of getting access to quick cash is worth the usually reasonable price. Unlike with credit cards, there is no waiting period before the application is approved, and this works to expedite the process of getting the cash. Many loans are approved within 24 hours, and the money is transferred to the borrower’s bank account, which adds a lot to the sense of convenience. According to the Consumer Financial Protection Bureau, payday lenders are not allowed to make threats to borrowers, and there are penalties that can be imposed on any company that threatens borrowers who default on the loan.
Are Payday Loans Really Different From Traditional Bank Loans?
There are many additional hurdles placed on borrowers seeking financial products through traditional lending institutions like banks. Banks typically require some form of collateral to be used to secure the loan, for example. This could be a vehicle, home or business property, but these assets are not available to a vast majority of borrowers. The bank also requires borrowers to provide documentation to show that they have a low income-to-debt ratio. They may conduct a credit check, and any problems with the credit score may disqualify the applicant. These are the most typical problems faced by borrowers who require access to fast cash. More information about short-term loans and other financial topics is available at Personal Money Store.