As soaring inflation squeezes consumers, financial regulators are concerned about predatory lenders taking advantage of low-income Americans who need cash fast.
So, what is predatory lending?
Predatory lending imposes unfair or abusive loan terms on borrowers, including triple-digit interest rates and narrow repayment windows. At the same time, under federal guidelines, “fair” lending guarantees the same access to credit for all consumers, including low-cost loans for people with good credit scores.
Key Points
Payday loans have been around since the early 1900s.
Interest rates on auto title loans can be as high as 300%.
California AG and other companies have tried to combat “bank lease” loans.
According to debt.org, an online website that offers advice from financial experts, predatory lenders may also persuade borrowers to accept unfair terms through deception, coercion, exploitation or unethical behavior. One example is a lender that targets borrowers with credit problems or who have recently lost their jobs.
Predatory lending practices may also include fraudulent, deceptive and unfair tactics used by lenders to “trick” consumers into not being able to afford the loan, according to the U.S. Attorney’s Office for Eastern Pennsylvania, which says high mortgage costs make it unaffordable for borrowers to keep their homes in good repair.
The Center for Responsible Lending, a North Carolina-based nonprofit research organization dedicated to ending predatory lending, released a study in late September that examined “the ongoing harms of high-cost installment loans,” a form of predatory lending that includes “rent-to-own” loans. which includes “rent-to-bank” loans. The organization said it found that predatory lending disproportionately affects people of color and low-income people.
In their own words: From the Mississippi Delta: “Sometimes we find ourselves at the mercy of payday loans.”
High-cost lenders say they are providing cash to high-risk borrowers with low credit scores and no access to loans from traditional banks.
Here’s what consumer finance groups are calling predatory lending.
What is a payday loan?
What is a payday loan?
A payday loan is a short-term advance that promises to be repaid on the next paycheck and has been around since the early 1900s.
According to the Philadelphia-based public policy organization Pew Charitable Trusts, they are known as payroll lenders and offer one-week loans with interest rates as high as 500 percent.
By contrast, consumers with good or excellent credit scores (720-850) may qualify for personal loans with interest rates of 10.73% to 12.5%, to be repaid over several years, according to Bankrate, a New York City-based financial services company.
Cracking Down on Payday Lending: Mississippi Social Justice Corporation Cracks Down on Payday “Predatory Lending” in Low-Income Communities
Today, payday loans are typically $500 or less, but at least 16 states and the District of Columbia have outlawed them. This is due to efforts by consumer watchdog groups in politically red and blue states to kick these lenders out for making predatory loans that target low-income borrowers.
The Consumer Federation of America, a Washington, D.C.-based nonprofit, has a breakdown of these loans, both legal and illegal, on its website.
What is an auto title loan?
Car title loans allow borrowers to use their cars as collateral to obtain loans ranging from hundreds to thousands of dollars. Many of these loans carry interest rates as high as 300% and reach triple digits.
For example, in Arizona, APRs range from 120% to 204%, depending on the amount borrowed.
James Hollis of Tucson, Arizona, borrowed $3,050 to repair his car’s transmission, but his two car title loans would end up costing him nearly $14,000.
USA Today’s CASSIDY ARAIZA
James Hollis, who lives on Social Security Disability benefits, borrowed $3,050 to repair his transmission this year, but his two auto title loans will end up costing him $13,791 with interest rates compounded in triple digits.
If a borrower defaults on the loan, the lender can repossess the vehicle.
According to Car Title Loan Lenders USA in Newport Beach, California, eight states, including California, have restrictions on car title loans, while 24 states and the District of Columbia prohibit such
loans.
What is a lease bank loan?
A lease bank loan is a loan where a non-bank lender (such as a fintech or fintech company) borrows money but tries to avoid state interest rate caps by working with a bank in another state that is not subject to those caps, according to the California Attorney General’s Office.
Unlike auto title loans, bank lease loans are unsecured, meaning the lender has no collateral, such as a home or vehicle, to take possession of if the borrower is unable to pay off the loan. Loans are available in lump sums or lines of credit ranging from a few hundred to a few thousand dollars.
