Online Cash Advance Availability May Soon be a Bygone Relic
Millions of borrowers have found that online cash advances can be an excellent option for dealing with unexpected expenses. Many borrowers cite the convenience of an online loan; the application can be handled from the comfort of the borrower’s home. Other borrowers appreciate the privacy afforded by an online cash advance; coworkers, neighbors or relatives will not witness the borrower entering or exiting a payday loan store. However, if the Consumer Financial Protection Bureau
, Hillary Clinton, various state legislators and others have their way, an online cash advance
may soon become unavailable to the millions of Americans who depend on these short-term loans to meet temporary financial challenges.
Why an Online Cash Advance May Soon Become a Thing of the Past
A cash advance is also called a payday loan. Whether the transaction occurs over an internet connection or at a physical store, the basic concept is simple. Borrowers submit a form, lenders verify the necessary information and both parties sign a contract. The borrower receives his cash and agrees to repay the loan on his next payday. The lender accepts a postdated check or a signed authorization for an electronic draft against the borrower’s account. When the loan becomes due, the lender deposits the check or submits an electronic request for payment.
However, complications can arise. Unscrupulous online cash advance lenders may fail to provide full disclosure of the terms of the loan and the method of repayment. Borrowers may not have a plan for repaying the loan, so when payday arrives, the funds may not be in their accounts to cover the payment. This can lead to overdraft charges or returned checks. Alternatively, the borrower may be able to renew the loan by paying only the fees related to the loan, a process referred to as a rollover.
Over the years, payday lenders have been criticized for their fees, and many opponents have charged that they set a “debt trap” for unsuspecting borrowers by allowing rollovers. Many states have responded by banning payday loans or setting the allowable fees so low that lenders find these types of loans unprofitable. In an effort to continue offering cash advances to borrowers in highly regulated states, many lenders moved online. However, the CFPB, an agency created in the aftermath of the financial meltdown of 2008, has proposed highly restrictive regulations that experts believe will drive many storefront and online lenders out of the cash advance market.
Should the Online Cash Advance Industry Be Regulated?
There is no question that all credit products aimed at consumers should have a certain amount of oversight. Although most lenders offering online payday loans comply with the law, provide complete disclosure and operate an ethical business, a few “bad apples” have been known to set up shop. Whether the business is an online payday lender, a major bank, a gasoline company, a mortgage company or a retailer, consumers have the right to be protected from illegal, fraudulent or abusive practices.
However, what is particularly disturbing about the proposed regulations drafted by the CFPB is that the new rules are expected to cause many lenders to stop offering short-term, small-dollar loans
. Many borrowers who turn to an online payday advance
loan when facing a financial crisis simply do not have access to an alternative form of credit.
Is the CFPB Regulating Cash Advances or Abolishing Them?
Shortly after the CFPB published its proposed regulations, Tim Worstall contributed a piece to Forbes. Worstall stated that the “practical effect of the new regulations” will be the abolishment of cash advance loans. Simply stated, the loans will no longer be profitable, so lenders will find other places to invest their capital. After all, there is no law requiring lenders to offer online loans, in-person payday loans or any other type of short-term credit product.
Many people erroneously assume that the new regulations only target loans that are transacted in person at the lender’s physical location. However, the new regulations also cover online payday loans, automobile title loans and certain small-dollar installment loans made to borrowers with poor credit. Bluntly stated, the CFPB’s regulations will have the most impact on those who have the least access to traditional credit products.
The CFPB is not acting alone in the war against online cash advance loans and similar offerings. Many states have already passed laws that will make it impossible for lenders to earn a profit on online loans. Since lenders are in business to make money, they will not keep investing funds in an enterprise that is losing money. Americans may well be witnessing the end of the online cash advance, and many borrowers will be challenged to find an acceptable alternative.
Is an Online Cash Advance the Right Choice for Everyone?
No credit product is right for every borrower. If you would like to explore the topic in greater detail, you can find more information about online cash advance loans at the Personal Money Store.
Tuesday, November 1st, 2016 by bryanh