Target: Richard Cordray, Director of the Consumer Financial Protection Bureau
Goal: Regulate payday loans so that they only cost five percent of the borrower’s monthly income.
Many people are losing a disastrous amount of money due to payday loans. A payday loan is a loan taken out against one’s paycheck, often with a ruinous interest rate attached. The Consumer Financial Protection Bureau (CFPB) has added new regulations to the payday loan industry. Twelve million Americans use pay day loans and one in three of those Americans are in favor of increased regulations. The new CFPB guidelines force lenders to check their applicants’ incomes and make sure that they can afford to pay back the money they borrow. However, payday lenders can still charge excessive fees and interest rates unless the CFPB tightens its regulations and makes payday loans affordable for consumers.
The average annual percentage rate for a payday loan is 391 percent. An annual percentage rate is the amount that is charged for taking out a loan over the course of a year. For every $100 borrowed in a payday loan, the average monthly fee charged is $15. The people who take out payday loans often cannot afford to pay them back. Forty-one percent of borrowers need outside cash such as money from family or friends, or a tax refund, to pay back the loan.
This creates a cycle of debt with disastrous consequences for those caught in it. One borrower lost her apartment, her car, and her credit rating because of payday loan debt. She described an interaction with her lenders as follows: “She [the lender] was like, ‘You’re a good customer. This [taking out another loan] would be helpful for you. It was the worst idea ever.”
Most payday loan borrowers can only afford to pay back a loan if it costs five percent or less of their monthly paycheck. To stop the cycle of debt that payday loans create it is necessary to limit the fees lenders can charge. Call on the CFPB to limit these fees and protect consumers from predatory lenders.
Dear Mr. Cordray,
I am writing to urge you to increase your regulations on the payday loan industry. The steps you have taken, compelling lenders to verify their borrowers’ income, are helpful. However, they do not go far enough. Lenders are still able to charge outrageous amounts of interest for their services, which leaves consumers stuck in a cycle of repeated loans. Safeguard consumers by restricting the amount of interest lenders can charge.
The average annual percentage rate of a payday loan is a crippling 391 percent. Most borrowers cannot afford this disproportionate rate and become trapped in a cycle of reoccurring debt. Just three percent of payday loans are utilized by borrowers that only take out one or two each year. The industry depends on the debt repeating itself and consequently customers may be encouraged to take out more than they can afford. One borrower depicted her experience with her lender in the following way: “She [the lender] was like, ‘You’re a good customer. This [taking out another loan] would be helpful for you. It was the worst idea ever.”
As long as the industry is allowed to charge its outrageous interest rates, consumers will be drawn into repeating debt. End the cycle now and reduce the interest lenders are permitted to charge.
[Your Name Here]
Photo Credit: Manuel De La Pena