The Consumer Financial Protection Bureau (CFPB) has finalised a new payday lending rule that requires lenders offering short-term, small-dollar loans to first determine if the borrowers have the ability to repay their loans.

The rule covers payday loans, auto title loans, deposit advance products, and longer-term loans with balloon payments.

CFPB said that payday loans usually have annual rates of over 300% and above and are usually due in full by the borrower’s next pay check, which is nearly two to four weeks. Defaulting can cause borrowers of payday loans to fall into payday debt traps where they are compelled to re-borrow or skip other financial obligations or basic living expenses.

Under the new rule, lenders will have a carry out a full payment test to determine the affordability of the borrowers upfront. The rule however, exempts community banks and credit unions.

The rule also includes principal-payoff option for certain short-term loans and penalty-fee prevention measures for short- term loans, balloon- payment loans, and other loans with an annual percentage rate of more than 36%.

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