Does the Government Help With Payday Loans?

Nothing keeps you up at night tossing and turning more than worrying about unpaid bills or a loss of income. Financial stress can be overwhelming. It affects your body and mind and leads to insomnia and sleepless nights.

Take Dave in Missouri, for instance, who borrowed $2,500 over five years and paid $61,000 in interest.

A payday loan can sometimes seem like the only option for 12 million Americans who make an average of $30,000 a year. Payday lending has ballooned to a $9 billion industry.

Can the government help with payday loans?

Though the federal government relaxed some rules on repaying loans such as student loans due to the ongoing COVID-19 crisis, payday loans and cash advance loans were not included.

Out of the 12 million Americans that take out a payday loan, only 14% of borrowers can pay back the payday loan as scheduled, leaving 25% of borrowers having to roll over the loan and set up an extended payment plan.

People taking out cash advance loans are left asking whether the government will help them.

If you want to know whether the government will help you pay off your payday loans, the answer is no. The government can’t help you pay off your loan through a grant.

But the federal government is looking for ways to limit payday lenders to end the debilitating debt cycle by curtailing interest rates and protecting borrowers from predatory lending practices.

As far as how much the government can help you, it will depend on specific state laws. For instance, some states will cap the loan amounts or interest rates, limit the number of pay cycles or limit the number of payday loans a person can take out, while some states even completely ban payday lending.

But state laws are unlikely to help you much if your loan is through a tribal lender.

Because the U.S. Constitution recognizes Indian reservations as sovereign nations, the companies offering tribal loans are subject only to tribal regulations and federal regulations on payday loans. These regulations are typically weaker than those of specific states — especially states with robust consumer protections.

The government can help protect you from lender and third-party collections harassment under the Fair Debt Collection Practices Act (FDCPA) and the Consumer Financial Protection Bureau (CFPB).

One way to protect yourself and make sure the rules are enforced is to let debt collectors know that you are aware of your rights under the FDCPA. Any violation should be documented and sent to the Federal Trade Commission, the Consumer Financial Protection Bureau, and your state attorney general’s office.

Payday loan forgiveness and COVID-19

Payday loans lead to regret. The average payday loan borrower will pay $520 in fees for borrowing $375. More than 90% of payday loan borrowers end up stuck in a cycle of debt, regretting that original payday loan. The coronavirus pandemic has only added to Americans’ financial challenges. While the CFPB has said it plans to make addressing payday lending problems a priority, there is no payday loan forgiveness program tied to any COVID-19 relief package. If you live in Delaware, Florida, Illinois, Massachusetts, Rhode Island or Texas, you can try to qualify for a loan through the Capital Good Fund, which offers crisis relief loans and other financial products. Capital Good Fund says it has financed 6,000 loans totaling $12 million. It also offers financial coaching programs.

If you don’t live in one of those states, you still have a few options. You can try taking out a Payday Alternative Loan through a credit union, a debt consolidation loan or an installment loan from a traditional lender. There are also a few other options we’ll get to later.

What is the Consumer Financial Protection Bureau, and does it help with payday loans?

The Consumer Financial Protection Bureau (CFPB) has been trying to crack down on payday lenders and protect consumers, but so far, it has been met by partisan resistance. But in June 2021, a law that previously allowed payday lenders to skirt interest rate state caps was overturned.

This predatory lending practice is known as a “rent-a-bank” scheme. It is a loophole wherein the payday lender would partner with a commercial bank chartered by the U.S. Treasury when making high-cost installment loans. Because a national bank is not based in one state, it is not subject to individual state usury laws.

When the coronavirus crisis hit, it brought with it a record number of job losses, many Americans’ finances spiraling out of control, evictions, and a host of other financial issues. Complaints at the CFPB skyrocketed 60% from 2019 to 2020.

In late 2020, the previous CFPB leadership issued two new debt collections rules addressing how debt collectors can communicate with and disclose information to borrowers.

According to CNBC, the new policies allowed debt collectors to hound consumers by calling them one time per day, per debt. For example, if you have five medical bills, you could receive 35 calls a week and unlimited texts and social media messages. 

President Joe Biden appointed a new CFPB leader who was confirmed in September. The new leadership is expected to lead to some changes.

The new leader, Rohit Chopra, a longtime consumer advocate and former student loan ombudsman at the CFPB, is expected to aggressively investigate and take action against consumer complaints and rogue companies, and to revisit some of the rules issued under the previous leadership.

State laws that help with payday loans

Your state government won’t pay your payday loan, but some states have policies that can limit the damage. Payday loans are banned altogether in several states and Washington D.C. Others may place limits on the annual percentage rates and fees that lenders can charge. Check the payday loan laws in your state to see if your loan is legal. You may not be required to pay back a loan that does not comply with state laws.

Some state governments have taken steps to help consumers.

Even states with lax restrictions have some guidelines. For instance, in Texas, which has virtually no payday lending restrictions, you can still check to see if your loan violates state rules by visiting the Texas Office of Consumer Credit Commissioner’s website at www.occc.texas.gov.

The OCCC takes questions and complaints from consumers about harmful debt collection practices such as unlawful creditor behavior, excessive calls to debtors, misrepresentation of facts, threats of arrest, and illegal repossession of property. Protect your rights by learning your state-specific law.

Contact your state attorney general’s office if you think your loan violates your state laws.

Other government help with payday loans

The Federal Trade Commission (FTC) provides detailed information on its fair debt collection page that is even available in Spanish.

You can also try a nonprofit credit counseling service. These credit counselors offer advice on managing money, adjusting financial habits, creating a budget, dealing with creditors, and making a plan to get out of debt.

The Fair Debt Collections Practices Act

This law was enacted in 1977 as an amendment to the Consumer Credit Protection Act. It established legal protection for consumers from abusive debt collection practices. It limited the actions of third-party debt collectors attempting to collect the debt by using any false, deceptive or misleading representation.

The Truth in Lending Act

The Truth in Lending Act was enacted into law in 1968 and is implemented by the Federal Reserve Board. TILA requires the lender to disclose the loan costs associated with extending credit, such as annual percentage rate (APR), loan terms, and total cost to the borrower so consumers can comparison shop.

This law protects consumers from lenders and creditors and helps consumers make well-informed decisions and terminate unfavorable contracts.

Federal Trade Commission Bureau of Consumer Protection

This regulatory body stops unfair, deceptive, and fraudulent business practices by collecting reports from consumers and conducting investigations, suing companies and people that break the law, developing rules to maintain a fair marketplace, and educating consumers and businesses about their rights and responsibilities.

The FTC protects us from scams by collecting reports about scammers and businesses that cheat people and sharing them with law enforcement to investigate fraud and eliminate unfair business practices.

Payday loans and the payday loan debt trap

These loans are meant to be short-term loans that are supposed to be paid on your next payday. Their interest rates are sky-high, sometimes up to 600% APR, have high-cost fees attached to the loan, and are structured this way because of convenience. All you need is a bank account and proof of income.

They have tight repayment deadlines — your next paycheck — and if you miss this, you get slapped with expensive late fees that compound with the exorbitant APR’s and you are left with no choice but to roll the loan over, which means additional fees and interest.

There are many horror stories and statistics about how borrowers fall into this payday loan death trap and can’t escape. In fact, more than 90% of payday loan borrowers end up regretting their original small-dollar loan.

The median interest rate is 38.5%. But some states don’t have caps at all. Interest can go as high as 662% in Texas on $300 borrowed. What that means is if you pay it back in two weeks, it will cost $370. If it takes five months, it will cost $1,001.

According to Pew Charitable Trusts, it takes an average of five months to pay back a $300 payday loan.

To learn more about payday loans, check out this video:

Alternatives to payday loans

If you can avoid taking out a payday loan at all costs, you should. Here are some other financial services to consider instead.

Credit union Payday Alternative Loans (PALs)

Credit unions provide payday alternative loans or PALs as a great option to a payday loan. They are small value loans offered explicitly through a credit union. You will want to join a credit union in advance if you anticipate needing to do a payday loan in the future. Most credit unions require you to be a member for at least a month, and loan amounts can range from $200-$1000. You can repay the loan in between one month and six months. The longer timeline to pay it off means you will have less of a chance to take out another loan to repay the original loan.

Interest rates are also capped at 28%, and the application fee is limited to $20. It is still a bit on the high side compared to most standard personal loans but well below the 600% that some charge.

You can take out three of these loans over a six-month period, but you cannot roll one into another.

Cash advance apps

Dave is one cash advance app that covers up to a $200 advance for a Dave direct deposit. The advance amount will depend on two qualified direct deposits, anticipated income, history of deposits and transactions for the last two months, how much you keep in the account, and if you have had recent negative balances on the account. You won’t pay interest or a finance charge. Dave works on tips and a $1 monthly subscription fee. Tipping is not mandatory.

There are several others, all with different features. Check out some of our top picks here.

Credit counseling

Credit counseling is used to help individuals get out of debt through settlement, education, budgeting, and various tools to reduce and ultimately eliminate debt. Credit counseling agencies advocate on your behalf to negotiate with creditors to resolve debt that is beyond a debtor’s ability to pay. Some nonprofit agencies charge minimal fees, while others can be for-profit and include high costs.

Credit card cash advance

A credit card cash advance is a service provided by most credit cards. The cash amount on your credit card is cash borrowed against your credit limit. The service allows cardholders to withdraw money through an ATM. In short, it’s a cash advance granted to you by your credit card with an interest fee.

The bottom line

While payday loans are easy, fast, and convenient to take out in a pinch, they are the worst possible option for you. They are riddled with high-interest rates and fees, have no installment plans available, have to pay it back in one lump sum, encourage habitual borrowing, and have a high probability of ruining your credit.

Look at more reasonable and sustainable alternatives and come up with some of your own. Payday loans should always be your last resort.

FAQs

Can I get a payday loan on Social Security?

Yes, but you shouldn’t take out a payday loan as a first option. It should be your last. Personalloans.com allows you to borrow $500 to $35,000 and can repay the loan over 3 to 72 months, and interest can range from 5.99% to 35.99%, making it a better alternative to a 400% APR by payday loan companies. They list on their site that Social Security income is accepted.

Will I go to jail if I don’t repay my payday loan?

The lender can take you to court, but the lender cannot have you put you in jail. If the lender or third-party collections agencies threaten you with this, make sure to let them know your rights and to stop this immediately and file a complaint with your state’s attorney general’s office or the Consumer Financial Protection Bureau.

Can I get a payday loan without a checking account?

Yes, this type of short-term loan is designed to be repaid in one lump sum in a month or less. The cash loan company only needs proof that you have the income to repay the debt with interest.

Will it hurt my credit score if I don’t repay my payday loan?

Yes, if you don’t pay your payday loan and it goes into collections, your credit score can take a direct hit up to 100 points, and the blemish stays on your report up to seven years, and worse, you can potentially have a hard time securing a loan in the future.

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