There are two different ways in which people reckon with debt. First, there are those individuals who have good credit. They can choose from among a variety of loans, including personal loans and home equity loans that draw on property value to meet their financial needs. And then there are those with dismal credit. These borrowers have few options, and even if they only need a small loan, they’re often targeted by payday lenders and weaker regulations may leave them more vulnerable.
Regulating Payday Loans
Payday loans are extremely high-interest rate loans offered over short periods and specifically targeted to low-income individuals who live paycheck to paycheck. Unfortunately, if not paid back in full with interest at the end of the loan period, borrowers tend to end up caught in a cycle and ultimately pay many times what the original loan was worth. It was with this issue in mind that the Consumer Financial Protection Bureau (CFPB) announced in 2016 that these lenders to realistically assess whether borrowers could afford to pay back their loans – but now those protections might be ending.
Earlier this year, President Trump announced that he intended to loosen payday lending regulations, specifically by eliminating this 2016 rule. Without assessing the ability of clients to pay, vulnerable borrowers are likely to find themselves deeper in debt and should be encouraged to seek alternatives to payday loans.
Assessing The Alternatives
As noted, those who rely on payday loans typically don’t have very many options to choose from, as they may not qualify for most personal loans. However, because the alternative lending marketplace has expanded in recent years, there are a few potential options, one of which is a bad credit loan.
Bad credit loans are similar to traditional personal loans but are provided to individuals who might not otherwise qualify. Unlike payday loans, though, bad credit loans still require the lender to confirm the borrower’s ability to pay the loan back. Furthermore, that confirmation means that borrowers may actually improve their credit through the use of such loans as the regularly repaid loan will become part of their credit history.
In a similar vein, individuals with bad credit may be able to access alternative installment loans rather than turning to expensive payday loans. Alternative installment loans are also designed for those with low credit scores and also require confirmation of income; some lenders will even ask to see borrowers’ utility bills to ensure they pay them on time. Unfortunately, what makes these loans similar to payday loans is that alternative installment loans have high APRs. Borrowers may technically be able to afford to pay them back, but they may put a strain on their finances.
The CFPB has claimed it would be detrimental to borrowers to evaluate their ability to pay before allowing payday lenders to extend a loan, and that not doing so will expand access to credit. For vulnerable borrowers, though, this is fundamentally untrue. If the CFPB’s job is, as their name says, to protect consumers, then they must move forward with greater regulation of payday loans so that vulnerable people will not be taken advantage of by unscrupulous lenders.