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How 2020 Us Election Could Affect Payday Loan Policy

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During the coming second wave of the pandemic, the stock market cannot ignore such a significant risk factor as the scheduled presidential election in the States.

Moreover, the illness of the President of the United States actually combined these two factors into one.

The confrontation between Republican Donald Trump and Democrat Joe Biden is unfolding against the backdrop of the strongest polarization of American society. Now it is roughly divided into important issues related to payday loans online and the acquisition of loans in general.

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Photo by Josh Appel on Unsplash

Payday Loan With the Risk of Tax Increases

The socio-economic policy is the main source of controversy. Trump, as a Republican, advocates low taxes and moderate government intervention in the economy. He is sympathetic to conservative industries such as oil and steel.

Biden, on the other hand, takes a much more leftist position. He is going to increase taxes on corporations of rich Americans, increase the minimum wage, make the health care system more accessible to citizens, and, accordingly, leave permission to take out payday loans to ordinary citizens.

Biden’s victory will cost the US corporate sector 5-6% of profits for companies included in the S&P index. But this will be partially offset by higher consumer spending on the back of payday loans.

An additional $ 1 per hour of the minimum wage will increase individual spending by $ 750 per quarter. Nevertheless, Biden is often perceived as an unwelcome candidate for the American corporate sector. In particular, companies have a lot of unskilled employees and cannot quickly raise prices.

Trump and Biden also disagree on a host of other issues: from health care reform to monetary policy and social media regulation. Although most of these points relate to US domestic politics, they somehow reflect the ideas that are being pondered in other countries. It makes these elections global to some extent.

Impact of Elections on Borrowers

The Trump administration lifted protections to make payday loans less risky for borrowers. This factor can influence the great majority of young people. Approximately 10 million millennials have taken out one short-term payday loan in the past two years.

The Consumer Financial Protection Bureau plans to drop the Obama-era payday loan provisions. This would require lenders to ensure borrowers to pay off their loans before making cash advances.

According to Horowitz, the Obama-era rules have already begun to work. Lenders were making the changes even before they officially went into effect, safer payday loans were starting to come in, and harmful practices were starting to disappear. There was no real reason or need for the change, he said.

Pitfalls of Payday Loans

Payday loans are allowed to borrowers in the amount of $ 500. You can get them in most states with a valid ID, proof of income, and a bank account. In recent years, American and international lenders have made them available online. The repayment process is also carried out online. The balance of the loan, along with finance fees (service fees and interest), is usually due two weeks later, on the next payday.

Payday loans can be extremely risky because they are expensive. The national average annual interest rate (APR) for a payday loan is nearly 400 percent. This is more than the average credit card interest rate.

Often borrowers cannot return the loan immediately. The Consumer Financial Protection Bureau found that nearly one in four payday loans is re-borrowed, while borrowers typically take about five months to pay off the loan, and average finance costs of $ 520. This is in excess of the original loan amount.

Payday lenders have a predatory business model. In this way, they make a profit while families fall into the intolerable debt trap of loans at rates as high as 400 percent per annum or higher. This means that even federal employees affected by the record-breaking government shutdown must avoid them.

Federal Agency Decision to Cancel Warranty

The CFPB in 2017 completed a new multilateral payday loan clause. It requires lenders to double-check before payday whether borrowers can afford to pay off their loan on time, checking information such as income, rents, and even student loan payments. The new set of rules was to apply to a wide range of short-term loan products other than payday loans including car loans.

To give companies time to adjust, the CFPB originally planned for the rules to take effect in August 2019. However, the Trump administration ordered the agency to postpone the implementation and conduct another review first.

The CFPB announced that it had completed its due diligence and found that solvency requirements restrict access to credit. Therefore, the new leadership of the agency offered to refuse these guarantees.

The CFPB decision was based on fears that the verification requirements would reduce access to credit. Furthermore, it would reduce competition in states which have determined it is in the best interest of their residents to be able to use such products, subject to restrictions imposed by state law.

According to the agency, there was insufficient evidence and legal support for the verification requirements. Removing this requirement will increase consumer access to credit.

The CFPB has maintained restrictions prohibiting payday lenders from repeatedly attempting to withdraw payments from a personal bank account.

Some payday lenders try to get their money back by taking the amount owed directly from the borrowers’ checking accounts, to which the borrowers provide access as a condition of the loan.

But an unexpected withdrawal by a lender can lead to an increase in overdraft fees and worsen credit ratings.

 
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