In early March, the Florida state legislature approved revamping regulations for payday loans, voting to allow payday lenders to make larger loans for a longer period of time.
The bill aims to allow alternative lenders to make installment-type loans up to $1,000, with a 60- to 90-day repayment period. The current law caps loans at $500 for a period of seven to 31 days.
The Florida bill is a response to proposed changes to federal regulations that might have an impact on the current smaller, short-term loans offered by payday lenders in the state. The bill’s supporters say payday loans can be a lifeline for low-income borrowers who can’t access other forms of credit, WLRN in Miami reported.
Opponents, on the other hand, have fought this proposal, claiming that payday loans trap low-income borrowers in a debt spiral.
“We have seen members of our congregations and those in the communities around them fall victim to the debt trap that this type of loan … creates,” Rachel Gunter Shapard, of the Cooperative Baptist Fellowship of Florida, said in a statement.
Looking Beyond Payday Lenders
While the Florida Senate approved these regulations, other groups want to give banks and credit unions more options to provide payday loans so borrowers could skip high-cost payday lenders.
The Pew Charitable Trusts proposed in February that banks and credit unions should be allowed to offer payday loans.
“Borrowers need a better option,” Alex Horowitz, senior research officer with Pew’s consumer finance project, told The New York Times.
Payday loans offer quick cash with paychecks used as collateral, but fees and interest rates are usually exorbitant, leading borrowers to roll the loan into several repayment periods. This is what traps consumers in a bad debt cycle.
The Pew Charitable Trusts’ proposal suggested that small banks could instead provide loans with payments capped at 5 percent of a borrower’s paycheck. Meanwhile, it said banks should not be allowed to roll over payments, charge overdraft fees, or have interest rates above “two digits.” Many payday lenders charge triple-digit interest rates.
According to The Pew Charitable Trusts’ research, the average payday loan customer borrows $375 over five months and pays $520 in fees, while banks and credit unions could profitably offer the same amount over the same period for less than $100.
Many consumers make mistakes that lead them to take out high-interest payday loans. For one, they might not comparison-shop for less costly options, one expert told CNBC. Another big mistake: They assume their credit isn’t good enough for lower-interest loans.
Consumers can take advantage of free credit reports and free credit scores to find out if they’re good candidates for a personal loan. Depending on the lender, a personal loan can be approved and disbursed in a relatively short time period.
Experts also recommend borrowers find other options, like selling unwanted items or reducing expenses, to help meet financial obligations whenever possible.
Author: Dave Rathmanner
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