The Consumer Financial Protection Bureau (CFPB), recently announced rules aimed at protecting Americans from getting into financially disastrous debt spirals due to repetitive short-term borrowing through payday loans.
“It’s a big win for the millions of Americans that need access to small dollar loans but often face exorbitant interest rates and fees charged by some lenders, which routinely amount to 300%–400% on an annualized basis,” says Aaron Klein, a fellow of Economic Studies at the Brooking Institute.
Consumers Need Short-Term Loans
There are concerns that the new regulations may make it so expensive and cumbersome for short-term lenders to make loans that many will exit the business. There are also many who advocate for doing away with the industry altogether.
The fact is, however, that many people rely on payday loans to make ends meet, and don’t have other borrowing options. When looking at millennials alone, a survey by PricewaterhouseCoopers and George Washington University’s Global Financial Literacy Excellence Center finds that 42% have taken out such loans in the past five years.
“Millions of Americans still live paycheck to paycheck with little to no safety net to guard against the realities of life…Small dollar loans fill a need when money runs out,” says Klein. “It’s the responsibility of regulators to ensure access to the credit they provide while limiting harm,” he adds.
Making Ends Meet
While regulators work to reshape the industry, it’s up to consumers to find ways to create financial security that won’t get them into a debt spiral.
- Look at your spending for the past 30 days and ask yourself if the items you are purchasing are ‘needs’ or ‘wants.’ If it falls in the ‘want’ category, then start stashing that money.
- Establish a rainy-day fund/emergency fund; then it’s time to start investing. If you have a little wiggle room in your budget, then I would say focus on deferring a percentage of your salary up to the employer’s match in your retirement account.
- As far as debt reduction, focus on intentionally paying off one bill at a time, of course while staying current (paying the minimum) on all other bills. Once that particular bill is paid off, take the monthly amount you are accustomed to paying and add that amount to the next bill.
Always remember that as difficult as cutting back may seem in the short run, the financial choices we make today affect our financial and personal well-being in the future.