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The Payday Loan Debt Trap

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CFPB Aims to Eliminate the So-Called Payday Loan Debt Trap

CFPB Aims to Eliminate the So-Called Payday Loan Debt Trap
The payday loan industry actively tries to trap people in cycles of debt that the Consumer Financial Protection Bureau is attempting to eliminate according to a recent article posted at Consumerfinance.gov. A payday loan is typically a short-term loan of between $100 and $500 that consumers can easily obtain when they need small amounts of cash until they receive their next paychecks. The costs of these loans usually run from $10 to $30 for each $100 according to the report.

The payday loan financing period only lasts about two weeks, so the annual percentage rate, or APR, translates into about 400 percent of annual interest. Critics of the industry and the CFPB charge that these high interest rates can trap people who have to borrow again to cover their living expenses. The industry counters that most borrowers repay their loans as promised, and that those who don’t are no more common than the number of people who default on other financial obligations.

The CFPB points out that the industry often targets low-income families with bad credit and ignorance of how to manage their finances responsibly. CFPB director Richard Cordray stated that the bureau was proposing a solution to end debt traps “by requiring lenders to take steps to make sure consumers have the ability to repay their loans...to end payday debt traps.” Details of the CFPB proposal include:
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