Bank of America Turns the Tables on Predatory Lenders

Source: Thinkstock

Source: Thinkstock

Financial regulators are now asking banks to do their part in restricting the lending activities of predatory payday lenders that charge enormous interest rates for short-term unsecured loans, which put customers at risk of getting trapped in a vicious debt spiral.

Payday loans are short-term cash advances of small amounts, maybe $500 or less. In order to avail a loan, a borrower issues post-dated checks or authorizes automatic withdrawal from his or her bank account when the next payday is due. Payday lending, which looks innocuous on the face of it, has become a monetary and social hazard for the low-income to middle-income American borrower. The annual percentage rate, or the interest rate charged by lenders on these cash advances, can be anywhere in the range of 400 to 700 percent or more. Though these interest rates are capped at reasonable rates in some states, these limits are sometimes simply ignored by payday lenders.

The payday lending model thrives on delayed repayments and loan rollovers, since lenders make neat margins from charging hefty fee for delays or rollovers, eventually putting people in a debt spiral that often ends in circumstances like legal and criminal threats to borrowers. It can often become difficult for borrowers to take a legal recourse by this point.

According to a report released by the Consumer Financial Protection Bureau in March, four out of five payday borrowers either default or renew a payday loan over the course of a year, and one out of five new payday loans end up costing the borrower more than the amount borrowed. The report also found out that three out of five payday loans are made to borrowers whose fee expenses exceed the amount borrowed, which means that borrowers who are unable or unwilling to repay the loans have ended up paying much more than the original loan amount as fees for rollovers.