The new rules will require consumers to disclose financial information whenever they use a cash advance product. (iStock )
Payroll advance products, often referred to as “earned wages” products, allow consumers to receive their paychecks in advance when they are in a difficult situation. Offered through employers or as direct loans to consumers, these products can be free but often have hefty fees. To clear up some misconceptions about these loans: The Consumer Financial Protection Bureau (CFPB) proposed the rule.
The rule explains that payroll advance products, like other credit products, should be subject to the Truth in Lending Act, under which lenders must legally disclose the true costs of fees that workers incur when using these products.
Payroll advance products are so commonly used that the CFPB felt it needed to step in. Employer-sponsored advances often have APRs exceeding 100%, and the CFPB found that workers typically take out 27 such loans per year, leading to a costly borrowing system. The average transaction for these loans is about $106.
“While workers’ wages have increased significantly in recent years, junk fees and high interest rates on financial products not only cut into those benefits, but exploit workers,” said Acting Labor Secretary Julie Su.
“As part of the most pro-worker, pro-union administration in history, the Department of Labor proudly supports the CFPB’s efforts to prevent predatory lending in the workplace,” Su said.
Consumers looking for alternatives to expensive payday advance products may want to consider a low-interest personal loan instead. Credible allows you to compare personal loan interest rates from multiple lenders without affecting your credit score.
80% of Americans are troubled by the rising cost of living
Borrowers will be subject to financial disclosure through new rules
The CFPB’s proposed rule is intended to clarify that payroll advance products are subject to the obligations of the Money Lenders Act. Some of the fees charged, particularly fees for expedited delivery, fall within the Act’s definition of a finance fee. If certain payroll advance products are truly fee-free products, they are exempt from the obligations of the Money Lenders Act.
Lenders that charge fees will be required to provide workers with detailed disclosures about the fees and finance charges associated with the use of their products. These disclosures will help consumers better understand what they are actually paying when using these products.
Disclosure helps lenders curb price gouging, promotes competition and holds them accountable, and helps consumers get the best deal. The system also rewards lenders who offer competitive prices.
“Payroll advance products are often marketed to and designed for employers, not employees,” said CFPB Director Rohit Chopra. “The CFPB’s action will help workers know what they’re getting into with these products and prevent a race-to-the-bottom business practice.”
If you’re looking to shop for a personal loan, Credible takes the hassle out of the process: With the click of a button, you can view multiple lenders, rates, and terms in one place.
Car leasing is becoming more popular, with consumers with good credit choosing the lease option more than 30% of the time.
BNPL continues to grow in popularity
Many financing products are growing in popularity, especially as inflation drives up everyday costs. Buy now, pay later (BNPL) options are especially popular: Nearly 85% of retailers say they have used BNPL more frequently at online checkouts in the past 12 months. PYMNTS Survey found.
The survey found that while consumers seem to like BNPL options, they aren’t necessarily popular among retailers: Only one in four retailers want their customers to use BNPL options, while 38% would rather customers use a credit card-like installment plan for larger purchases.
But consumers and merchants are not on the same page, with younger generations especially in favor of BNPL options. Another report by PYMNTSNearly half of Gen Z and millennials surveyed said they had used a BNPL option at least once in the past year.
Additionally, roughly 23% of Gen Z and millennials said they have increased their use of BNPL in the past 12 months, and consumers across these generations are unlikely to abandon their reliance on BNPL, especially since 79% of users said they were very satisfied with their BNPL experience.
A strong alternative to BNPL options is a personal loan, especially when making a large purchase, and Credible can help you find a reputable personal loan lender who will provide you with funding in a timely manner.
CFPB Announces It Will Treat Pay Later Products Like Credit Cards
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