New payday loan rules: What you need to know

 In Business

What is the CFPB?

The Consumer Financial Protection Bureau issued new rules on payday loans this week.

Consumer advocates say the rules will help low-income people and families trapped in endless cycles of debt.

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The industry argues that payday loans provide an option for people facing unexpected expenses or financial emergencies. The rules could cripple the industry, which collected about $3.6 billion in fee revenue in 2015, according to the CFPB.

Here’s what you need to know about payday loans and the new regulations.

What are payday loans?

Payday loans are typically between $200 and $1,000 and must be paid back when a borrower receives his or her next paycheck.

On average, borrowers incur a $15 fee for every $100 borrowed, according to the Community Financial Services Association of America (CFSA), which represents payday lenders. That’s the equivalent of a more than 391% annual interest rate.

Where do you get them?

A patchwork of state laws may limit access in some areas or cap the amount people can borrow. Some states have banned them entirely, according to the National Conference of State Legislatures.

What’s the controversy?

The CFPB argues that most customers who take out payday loans can’t afford them.

About four out of five payday loan customers re-borrow their loan within a month. A quarter end up re-borrowing more than eight times, according to the CFPB. All the while, they rack up new fees.

Watchdog groups have long labeled payday lending practices as “predatory.”

Dennis Shaul, CEO of the CFSA industry group, concedes that some customers do get trapped by payday loans in a harmful cycle of debt — but it’s a small percentage, maybe 15%, he says.

He insists the industry is not out to prey on the financially vulnerable.

“We’re making about an average of 4% return on investment,” he told CNNMoney. “We’re not making an obscene profit on the backs of people.”

What do the new rules do?

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