Financial traps for low-risk consumers who apply for short-term "bad credit loans"
The director of the Bureau for Consumer Protection said that the innovation will help stop the development of financial traps for low-risk consumers who apply for short-term loans bad credit loans guaranteed approval. Often borrowers, without knowing it, get into a real debt hole, which they cannot get rid of later. The new rule will save them from such a danger, which gives confidence in their financial independence even when appealing to credit institutions.
The so-called payment tests put into circulation in the above-mentioned rule will allow determining with accuracy the solvent borrowers. This will save citizens with minimal financial literacy from the tricky traps of creditors. Now the borrowers and their assets cannot be manipulated by creditors, says financial specialist Jen Smith.
It seems that the new rule gives hope for a bright future, but what does it mean in practice? Let's figure it out right now.
The innovation from the Consumer Protection Bureau will affect the issuance of such loan products as short-term online loans "before payday", loans with collateral, long-term loans with a maturity of up to forty-five days, as well as advance payments on deposits and overdrafts.
What is a short-term cash loan? This is a loan that is outstanding in small amounts for the personal use of the borrower. Basically, the products of such a plan are issued for no more than two weeks, and the maximum amount of payment is not more than a thousand dollars. At the time of application, the creditor does not check the entire credit history of the client - checking and assessing the financial condition of the borrower is only in the presence of a bank account for which a salary or other monthly payment is received (unemployment benefit, scholarship, etc.).
According to the agreement between the client and the loan service, the loan and interest on it are paid in full at the expiration of the period for which he undertook. Some contracts stipulate the possibility of withdrawing the required funds from the client's account by the creditor without notifying the borrower.
In case of late repayment, or if a person cannot pay the loan at the appointed time, there are only two possibilities:
To extend the term of payment - this service is paid, and will require making even more money. Take another loan to pay the previous one.
Due to the short period of the loan, "up to pay" loans have astronomical interest rates. For the year the figure can be 300%! And this is a very big difference compared to conventional and already familiar bank loans.
Loans with collateral are another type of short-term loan, which uses as a guarantee of payment any collateral from the client. In this case, if the borrower is insolvent, the creditor has the right to take this pledge as compensation for its losses. Since most of the citizens leave their cars as collateral, the institutions for loans very well compensate their costs, not only in full, but also beyond it. Such loans should also be paid at a time, rather than in installments.
With an uncomplicated calculation for a month's period of taking such a loan, the interest will be at least 25%. For the year the figure grows to 300%, which is also an unbearable sum for most borrowers. In order not to lose his pledge, the client is forced to extend his term, more and more plunging into the debt hole.
It is about such situations that the Bureau for the Protection of Consumer Rights says.
The new rule will allow checking the client's ability to fully pay for the borrowed loan
Most loans "before payday" and loans on bail are providing their services to people with a bad credit history. Such citizens either do not have a permanent income, or it is too low. And in the presence of a bad credit history, banking institutions deny them access to standard and more profitable products.
In case of serious financial difficulties or in the presence of an emergency situation, such people see short-term loans before payday loans or loans with a lien the only way out of the situation.
At the same time, such creditors do not check the credit history, as well as the ability to fully pay the loan at the end of the loan period. The percentage of refusals in such companies is minimal, but it does exist.
The Bureau of Consumer Protection sees this situation differently - in their opinion, credit institutions of such a plan must necessarily check the solvency of their customers. How to do it? Issue the first loan without the possibility of extending its terms (even fee), as well as issuing a re-loan to repay the previous one. This item is also included in the new rule, which has already entered into force in the United States.
How does the new solvency check rule work with bad credit loans guaranteed approval?
The Consumer Protection Bureau demanded that creditors begin to fully verify the solvency of their customers. This list includes the possibility of repaying the loan taken, as well as the provision of other important financial information, such as the indication of housing costs and others.
Loans "before payday," and also on bail are obliged to issue the first loan with the condition of its full repayment without the possibility of extending and issuing a new loan. At the same time, the period for providing services should not exceed one month, and when calculating the amount of debt payment all charges and expenses should be taken into account.
Now, the creditors will have to check the entire credit history of the client, as well as his ability to pay for his housing during the month when full repayment of the loan is expected.
But that's not all. The new rule establishes that the borrower cannot take more than three short-term loans in a row. After the third loan, the Consumer Protection Bureau set a thirty-day break. Only after a month the citizen can again use these services.
When the amount is repaid in installments, the creditors may refuse to carry out a check on the solvency of borrowers. In this case, the client is given the opportunity to repay his debt in installments that will be constantly reduced. This opportunity appeared only in those products that offer no more than $ 500.
In this case, the pledge is excluded in this atrocious credit loans with assured approval.
The creditors will be able to offer this option only after the same client has received and paid three loans before. The assured approval also banned issuing this type of loan to those borrowers who used the services of atrocious credit loans more than six times or could not pay the loan within ninety days during the current year.
There is also a list of provisions in the performance of which creditors can be exempted from the rule of checking the solvency of customers:
Withdrawal without consent is canceled
The last feature in the innovations is the cancellation of withdrawal of funds from the borrower's account without his consent and notification. What does it mean? If a person can not pay the amount in time, the bad credit loans guaranteed approval institution has no right to withdraw funds from his current account without the knowledge of the citizen. Often, with uncontrolled withdrawal of money, a person remains at zero, which is not permissible due to short-term loans. That is why now lenders will not be able to withdraw money more than twice, even with a long delay on the part of the borrower. In addition, when withdrawing small amounts, you must notify the client in writing. Especially this rule applies to loans with interest rates above 36%.
How are things now if you have awful trust and can not to get assured approbation?
As always, everything is complicated with innovations. After the adoption of this rule, 21 months must pass for it to take effect. That is, users with short-term loans will not breathe peacefully until mid-2019. Do not forget about the possibility of the formation of lawsuits or the emergence of agreements between the assured approbation and creditors who provide short-term loans.
It should be noted that many microcredit organizations consider this rule to be catastrophic for their sphere of activity. Large interest rates are set due to small amounts and large risks do not receive funds back. The provisions in the innovations will lead to the complete collapse of short-term loans, so it's too early to rejoice.
The only thing that can please in this situation is that credit organizations will begin to increase the number of their products, and with it the quality of the services provided.