If you're in need of cash — fast — make sure a payday loan really is your last resort. Cash-strapped consumers may have more options than they realize.
The Consumer Financial Protection Bureau is proposing new rules to curtail payday lending practices the agency says can lead borrowers into long-term "debt traps."
The protections would cover products including payday and other short-term loans, auto-title loans and some high-cost installment loans. Rates on such products, it says, can be as high as 390 percent — or more.
"Too many borrowers seeking a short-term cash fix are saddled with loans they cannot afford and sink into long-term debt," CFPB Director Richard Cordray said in a prepared statement. "By putting in place mainstream, common-sense lending standards, our proposal would prevent lenders from succeeding by setting up borrowers to fail."
Among protections in the proposal, lenders would need to conduct an upfront "full-payment" test to determine if borrowers will be able to pay the loan without compromising other financial obligations and without needing to reborrow (a cycle that piles on fees and interest, making it harder to dig out).
Borrowers who don't meet those requirements would have access to alternatives including a principal payoff option on a small, short-term loan or less-risky longer-term loans.
The CFPB proposal would also curtail lenders' ability to dip into a borrower's bank account to collect payment, potentially triggering overdraft fees or causing the bank to close that account. Lenders would be required to notify the borrower in writing first, and would be limited to two unsuccessful debit attempts before going back to the borrower for new authorization.
Implementation of the rules as currently proposed is far from a given, however.
"Today's proposal, along with past regulatory actions, will make it challenging for banks to meet the needs of the estimated 50 million consumers who access a variety of bank and nonbank small-dollar lending products each year," said Virginia O'Neill, senior vice president of the American Bankers Association's Center for Regulatory Compliance, in a statement.
The Community Financial Services Association of America — an industry group for payday and small-dollar lenders —called the proposed rule a "staggering blow" that will cut off consumers' access to credit.
Consumers who turn to payday loans don't have access to avenues that middle-class consumers might tap, like opening a home equity loan or borrowing from a retirement account, said Greg McBride, chief financial analyst at Bankrate.com. Many have limited access to credit, or don't have a bank account.
"The people who have payday loans don't have those alternatives," he said.
But there are still options to consider first, said Bruce McClary, a spokesman for the National Foundation for Credit Counseling.
"Don't ever be in a hurry to borrow money," he said. "Nine times out of 10 you're going to end up getting a bad deal."
First consideration: Can you avoid borrowing, period? Selling clothing or household goods might be preferable to taking out a small loan, McClary said.
If you need to borrow, start off by pulling your credit score from one of the many sites that offer free access. Banks and credit unions may offer small short-term loans with more competitive rates, yet many payday loan customers don't comparison shop to see if they might qualify, he said.
"That assumption is a costly assumption," McClary said. "Don't make a decision without knowing where you stand."
Your employer may offer an interest-free advance on your paycheck, but weigh the risks.
"If you put yourself in hock to the boss, it's probably not a good place to go from a career standpoint," said McBride. If you're living paycheck to paycheck, that advance is also likely to catch up with you for future bills.
As an alternative, there are several apps that also can help boost your paycheck, said Gerri Detweiler, head of market education at Nav, a site that helps business owners manage their credit. Even.com helps balance out uneven paychecks, she said, offering interest-free advances when your paycheck is lower than average. (Users pay back the advance on their next higher-than-normal check; using the app costs $3 per week after a 30-day trial.)
There's also ActiveHours.com, which lets users get early access to their pay based on the hours they have already worked. (The service charges your bank account on your next payday to reclaim the amount you advanced. Users can decide how much to pay, the site notes, "based on what you think is fair.")
"If all other options have failed and you have to turn to a payday lender, make sure you know the laws in your state," McClary said.
Regulations are "all over the map," he said, and it's important to know what kind of policies and rates you might face for in-person and online borrowing. Check up on the lender in the CFPB's complaint database.
Looking ahead, take steps to help avoid needing more fast cash down the line.
"Nearly 30 percent of Americans don't have any emergency savings at all," McBride said. "Every little bit you can squirrel away in a savings account acts as a buffer."