Financial watchdog groups have raised concerns about predatory lenders taking advantage of low-income Americans in need of quick cash as soaring inflation squeezes consumers.
So, what is a predatory loan?
Predatory lending imposes unfair or abusive loan terms on borrowers, including triple-digit interest rates and narrow time windows for repayment. Meanwhile, a “fair” loan guarantees the same lending opportunities to all consumers, including low-cost loans for those with good credit scores, according to federal guidelines.
A predatory lender also may persuade a borrower to accept unfair terms through deceptive, coercive, exploitative or unscrupulous actions, according to Orlando-based debt.org, an online site that gives advice from financial experts. One example is lenders who target borrowers with credit problems or who have recently lost their jobs.
Predatory lending practices also can include fraudulent, deceptive and unfair tactics lenders use to “dupe” consumers into loans they can’t afford, according to the U.S. Attorney’s Office of Eastern Pennsylvania, which cites high mortgage costs as contributing to borrowers who can’t keep their homes in good repair.
The Center for Responsible Lending, a North Carolina-based nonprofit research organization that works to end predatory lending, released a study in late September that examined the “persistent harms of high-cost installment loans,” a form of predatory lending that includes “rent-a-bank” loans. The group says it found predatory loans had a greater impact on people of color and people with low incomes.
High-cost lenders say they are providing cash to risky borrowers with low credit scores who cannot obtain loans from traditional banks.
Here’s a look at what consumer financial organizations call predatory loans.
Payday loans, a short-term advance on the promise of repayment at the next paycheck, have been around since the early 1900s.
They were called salary lenders, offering one-week loans with triple-digit interest rates of up to 500%, according to the Pew Charitable Trusts, a Philadelphia-based public policy organization.
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% paid back over several years, according to Bankrate, a New York City-based financial services company.
Today, the payday loan amounts are generally for $500 or less, but at least 16 states and the District of Columbia have outlawed them. That’s because consumer watchdog groups have worked in politically red and blue states to kick these lenders out, saying they offer predatory loans that target low-income borrowers.
The Consumer Federation of America, a Washington, D.C.-based nonprofit organization, has a breakdown on its website of where these loans are legal and illegal.
A car title loan allows borrowers to use their car as collateral to obtain a loan that can range from a few hundred to several thousand dollars. Many of those loans can come with triple-digit interest rates reaching 300%.
In Arizona, for example, the annual percentage rate is 120% to 204%, depending on how much is borrowed.
James Hollis, who lives on Social Security disability payments, this year borrowed $3,050 to get his transmission fixed, but his two car title loans will ultimately cost him $13,791 with compounding triple-digit interest rates.
If a borrower defaults on a loan, the lender can repossess the vehicle.
Eight states, including California, have limits on car title loans, while 24 states and the District of Columbia prohibit them, according to Car Title Loan Lenders USA of Newport Beach, Calif.
A rent-a-bank loan is when a non-bank lender, such as a financial technology or fintech company, lends money but seeks to avoid state interest-rate caps by partnering with a bank in another state not subject to those rate caps, according to the California Attorney General’s Office.
Unlike a car title loan, a rent-a-bank loan is unsecured, which means the lender has no collateral, like a house or vehicle, to take possession of if the borrower can’t pay off their loan. The loans can range from a few hundred to several thousand dollars in lump sum amounts or lines of credit.
California Attorney General Rob Bonta and 20 attorneys general urged federal regulators last year to prohibit the practice, which still occurs and is replacing payday lending in some states, USA TODAY found.
A tax refund loan or refund application loan are short-term loans issued by non-bank lenders. They are secured with an expected tax refund. Taxpayers get immediate cash in the amount of the refund, minus one or more fees, according to the Financial Industry Regulatory Authority (FINRA), a regulator of brokerage firms and exchange markets.
These loans come with numerous fees such as loan application, tax preparation, check processing and a “peace of mind” guarantee from the lender regarding the amount of refund.
Those fees also come with interest of at least 36%.
Adding everything up can result in paying a minimum of $200 for a fast tax refund of $2,000, according to FINRA.
The organization says the best move is to have the Internal Revenue Service electronically refund the overpayment of taxes, which can be as short as eight days to a checking or savings account.
New America, a nonprofit think tank in Washington, D.C., said a select number of banks may offer up to $1,000 in personal loans with interest rates around 12%. The site also lists seven Community Development Financial Institutions and credit unions across the country that offer relatively small-dollar loans with interest of 7.99% to 33%.
The nonprofit also said cash advances from credit cards can be easy but are expensive.
New America also promotes lending circles, in which a small group of people chip in every month to lend money to one another at no interest. The circles include six to 12 people and loan amounts range from $300 to $2,400. The loan payments can be reported to credit bureaus so borrowers can build up good credit. But this would not help a person with an immediate need, the site said.
The website Lending Circles, funded by the San Francisco-based nonprofit Mission Asset Fund, includes names and contact numbers of lending groups across the country, and a person can find one by entering a ZIP code.