You may not think it’s happening to you until it’s too late. Debt traps are real, and one can happen when you can’t repay a loan because of the high interest charges. But the Consumer Financial Protection Bureau (CFPB) is on a mission to end these debt traps.

People Are Vulnerable

debt, debt trap, debt cycleWho is at risk to get trapped by debt? According to the Consumer Federation of America (CFA), communities of color with financial stability issues are at the highest risk. Borrowers who take out multiple loans are also at risk.

Consumers who take out payday loans also risk getting themselves in a debt trap. Payday loans have an annual interest rate over 300 percent, which is extremely unaffordable. Ultimately, these loans trap consumers into rolling them over into new loans, creating a never ending cycle of debt. According to the CFPB’s research, 70 percent of borrowers take out a second loan within one month, and one in five borrowers take out 10 or more loans consecutively.

New Requirement

Because debt traps have become such an issue, the CFPB has implemented a new “ability-to-repay” requirement to protect consumers with shorter-term loans. These consumers must be able to repay all, or most, of the debt at once, including payday loans, auto title loans and longer-term loans, with a balloon payment (repayment of the remaining balance made at the end of a loan period).

The issue with debt traps is that lenders still benefit from consumers' sufferings. In states that allow these types of loans to occur, lenders make a profit regardless of whether the loan is fully paid off or not. The new rule will stop these lenders from making such large profits, and will require them to establish a borrower’s ability to repay the loan.

Bottom Line

Falling into a debt trap can hit your credit hard. Not all lenders are reliable, while some are unable to work with your unique situation. That’s why, here at Auto Credit Express, we want to help you find the right dealer. We work with a nationwide network of special finance dealers who have the lenders willing to work with people in challenging credit situations. Get started today, so we can match you with a local dealer. Simply fill out our online auto loan request form to get started.