Payday loans and cash advances can be simple to obtain. Most states that allow payday lending allow borrowers to take out one of these loans by just stepping into a lender’s office and presenting only a valid identification card, proof of income, and a bank account. In contrast to a mortgage or auto loan, there is usually no physical collateral required, and the borrowed money is typically returned two weeks after it was borrowed. On paydaychampion.com, you may read more about payday loans and cash advance ins and outs.

Regulations that limit interest rates on payday loans

Several states, including Illinois and Nebraska, have recently enacted regulations that limit interest rates on consumer loans, including payday loans, to 36 percent.

Advocacy groups claim that these restrictions prevent consumers from getting into financial trouble with these traditionally high-cost loans. Still, opponents argue that these types of laws will restrict access to credit by forcing lenders out of business with unsustainable interest rates, leaving people with nowhere to turn when they’re short on cash when they need it.

Even though these 36 percent rate limitations are well-intentioned, new research published Monday suggests that a different method may have a more significant impact on lowering the number of Americans who become trapped in a so-called “debt trap,” in which they struggle to pay back the loan.

According to the paper, it is suggested that rules requiring lenders to deny borrowers any new loans for 30 days after they have taken out three consecutive payday loans are the most beneficial to consumers. According to the survey results, approximately 90 percent of borrowers desired additional reasons to avoid payday loan debt in the future. This approach would provide that motivation without immediately restricting access to credit.

Eliminating payday loans

The study’s lead researcher, Hunt Allcott, a visiting professor of law at Harvard University, argues that eliminating payday loans is harmful to consumers overall. “However, policies that allow payday lending but limit repeat borrowing can benefit consumers,” he says.

However, because of the high-interest rates, which can reach over 600 percent annual percentage rate in some jurisdictions, and the fast turnaround time, these loans can be expensive and difficult to repay. According to a study undertaken by the Consumer Financial Protection Bureau, approximately one in every four payday loans is repaid nine or more times before being paid off. Furthermore, according to The Pew Charitable Trusts, it takes borrowers around five months to pay off their loans, with an average financing charge of $520.

A 30-day “cooling off period” for payday loans provides customers with access to credit when they need it. Still, it also forces them to repay the loan sooner (rather than reborrowing it), which is consistent with what borrowers say they want for themselves in the long run, according to Allcott.

According to Allcott, the cooling-off period must be at least one month long since it must be long enough to genuinely force borrowers to go through a pay cycle without taking out a payday loan.

“Most people have a significant amount of money in their bank account in the days following their paycheck. According to Allcott, “it isn’t until you are within a few days of your next paycheck that you realize you are genuinely short on funds and require a loan to make ends meet.”

It’s important to note that the research released on Monday relies on several critical assumptions, including the notion that rate limitations on consumer loans, such as the 36 percent model, will effectively operate as a complete ban on payday lending.

The research also does not consider the impact of moderate interest rate caps or rules that encourage people to pay back loans over time, such as those implemented in Ohio and the now-rescinded 2017 rule from the Consumer Financial Protection Bureau, which were both previously considered.