Payday Loans Legal Issues

Henry Githinji

Henry Githinji

Henry plans to be an entrepreneur with his own financial consultancy firm, specializing in in binary options and stock trading. Henry is a day trader and plans to use the capital he makes to launch his business. He plans to build a portfolio that attracts investors through his trading performance.
Henry Githinji

Regulation of payday loans


The business of lending and borrowing has been evolving with the establishment of different forms of loans established over the years. The most important use of loans is probably to help out during emergency situations. In short, loans should be able to benefit us and not hurt us. However, this is not the case in most scenarios in recent years in the payday loans sector. Most people are falling deep in debt without even realizing it.

A payday loan is a loan which the borrower is supposed to repay by his next paycheck. Should the borrower has difficulty repaying the full amount, he may decide to rollover the loan for the next month. This means the borrower has to pay more interest that he would have initially. The penalty for not paying on time plus the new interest rate on top of the actual amount of money he had initially borrowed. This lead to more people taking up another loan to service the loan first taken up. This in turn results in the individual slowly sliding deeper into debt as time goes by.

This is the actual reason why the Consumer Financial Protection Board (CFPB) decided to move in and rectify the situation before debt destroys the average borrower’s credit history.

Observation and recognition by the CFPB

Observation & recognition by the CFPB

Observation & recognition by the CFPB

The CFPB has recognized that most payday loans including online payday loans in the market are simply not affordable for most people. However, people still take up the loans and end up getting into more trouble. Research also showed that loans were repeatedly rolled over, thus pushing the borrower deeper into debt. Moreover, payday lenders seem to have been going after the borrowers. The situation has gotten so bad that payday lenders now access the customer’s bank account to withdraw repayment for themselves. This puts the customers in a dreadful financial situation.

What the CFPB did

The board decided that they would use two main methods:

  1. Protection
  1. Prevention


lender inquiring borrower's financial situation

lender inquiring borrower’s financial situation

Prevention is a very simple solution that is both theoretically correct and very practical. It involves the lender inquiring into the borrower’s financial situation. This allows the payday lender to determine if the borrower would be able to repay the loan amount. If the borrower doesn’t qualify for the loan, then he is prevented from taking up one. In a way, the disqualification prevents the borrower from getting into debt.


This solution requires the lender to follow various well-stipulated restrictions which ensure that the borrower can afford to repay his debt. This prevents the payday lender from harassing the borrower.

Ending debt traps

Ending debt traps

Ending debt traps

For loans like payday loans which have to be paid in full within 45 days, a proposal is established to allow the lender to extend the short-term loan without trapping the borrower in debt. Payday loans relief on the paycheck of the borrower to service the loan. The proposal also has a couple of requirements that are in place to protect the borrower.

The proposal is that the lender had to verify the potential borrower’s ability to pay back the loan. It also suggested that there be a 60-day cooling off period between loans. That way, the borrower can have breathing space before going back to borrowing again. That way, all debts can be cleared before another loan is taken up. The lender should also have proper documentation of the borrowing history of the customer.

The other proposal is the provision of affordable options by limiting the number of loans a borrower can take in a row. If the borrower decides to take more than two loans, two proposal options are given:

  1. The lenders will ask to decrease the principal of each loan.
  1. There should be a no-cost “off-ramp” after the third loan to allow the borrower to pay off the loan over time without further fees.

All these propositions are aimed at keeping the borrowers safe from nasty payday lenders and to allow enough time for him to repay his loan.


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