What is a payday loan and other types of predatory loans?

Financial watchdog groups have raised concerns about predatory lenders taking advantage of low-income Americans who need cash fast as soaring inflation squeezes consumers.

So what is predatory lending?

Predatory lending imposes unfair or abusive loan terms on borrowers, including triple-digit interest rates and tight repayment terms. In the meantime, a “fair” loan guarantees the the same lending opportunities for all consumers, including low-cost loans for those with good credit ratings, in accordance with federal guidelines.

A predatory lender may also persuade a borrower to accept abusive terms through deceptive, coercive, exploitative or unscrupulous actions, according to Orlando-based debt.org, an online site that provides expert financial advice. An example is lenders targeting borrowers with credit problems or who have recently lost their jobs.

Predatory lending practices may also include fraudulent, deceptive and unfair tactics lenders use to ‘trick’ consumers into loans they cannot afford, according to the U.S. Attorney’s Office for Eastern Pennsylvania, citing costs high mortgages as contributing to borrowers who cannot keep their homes in good condition.

A person rides a scooter past a check cashing and payday loan store on March 11, 2022, in downtown Los Angeles.
PATRICK T. FALLON/AFP via Getty Images

Responsible Credit Centera North Carolina-based nonprofit research organization working to end predatory lending, released a study in late September that examined the “persistent damage of high-cost installment loans”, a form of predatory lending that includes “rent-a-bank” loans. The group says it found that predatory lending had a greater impact on people of color and low-income people.

High-cost lenders say they provide money to risky borrowers with low credit ratings who cannot obtain loans from traditional banks.

Here’s a look at what consumer financial organizations call predatory lending.

What is a personal loan?

Payday loans, a short-term advance with the promise of repayment on the next paycheque, have been around since the early 1900s.

They were called payday lenders, offering one-week loans with triple-digit interest rates of up to 500%, according to the Pew Charitable Trusts.a public policy organization based in Philadelphia.

In contrast, consumers with good or excellent credit scores (720-850) can qualify for personal loans with interest rates of 10.73% to 12.5% ​​repaid over several years, depending on Bankrate, a New York-based financial services company.

Today, payday loan amounts are usually $500 or less, but at least 16 states and the District of Columbia have banned them. Indeed, consumer watchdog groups have worked in politically red and blue states to kick out these lenders, saying they offer predatory lending that targets low-income borrowers.

The Consumer Federation of America, a nonprofit organization based in Washington, DC, has a breakdown on its website of where these loans are legal and illegal.

What is an auto title loan?

A car title loan allows borrowers to use their car as collateral for a loan that can range from a few hundred to several thousand dollars. Many of these loans can carry three-digit interest rates as high as 300%.

In Arizona, for example, the annual percentage rate is 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 will ultimately cost him nearly $14,000.
James Hollis of Tucson, Arizona borrowed $3,050 to repair his car’s transmission, but his two car title loans will ultimately cost him nearly $14,000.
Cassidy Araiza for USA TODAY

James Hollis, who lives on Social Security disability benefits, borrowed $3,050 this year to fix his transmission, but his two car title loans will ultimately cost him $13,791 with three-pronged interest rates figures.

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, CA.

What is a rent-a-bank loan?

A bank lease loan occurs when a non-bank lender, such as a fintech or fintech company, lends money but seeks to avoid state interest rate caps in s associating with a bank in another State not subject to these rate caps, according to the California Attorney General’s Office.

Unlike a car title loan, a bank lease loan is unsecured, meaning the lender has no collateral, such as a house or vehicle, to take possession of if the borrower does not can’t repay his loan. Loans can range from a few hundred to several thousand dollars in lump sums or lines of credit.

California Attorney General Rob Bonta and 20 attorneys general urged federal regulators last year to ban the practice, which is still happening and replacing payday loans in some states, USA TODAY found.

What is a tax-free loan?

A tax refund loan or refund claim loan are short-term loans issued by non-bank lenders. They are guaranteed by an expected tax refund. Taxpayers immediately receive in cash the amount of the refund, less one or more costs, according to the Financial Industry Regulatory Authority (FINRA), a regulator of brokerage firms and foreign exchange markets.

These loans come with numerous fees such as applying for the loan, preparing tax returns, processing checks, and a guarantee of “peace of mind” from the lender regarding the amount of repayment.

These fees are also accompanied by interest of at least 36%.

Adding it all up can result in paying a minimum of $200 for a quick $2,000 tax refund, according to FINRA.

The organization says the best solution is to have the Internal Revenue Service electronically refund the overpayment of taxes, which can be as short as eight days in a checking or savings account.

What are low cost loan options?

New America, a nonprofit think tank in Washington, DC, said a number of banks can 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 loans with interest ranging from 7.99% to 33%.

The nonprofit also said credit card cash advances can be easy but expensive.

New America also promotes lending circles, in which a small group of people contribute each month to lend money to each other without interest. Circles include 6 to 12 people and loan amounts range from $300 to $2,400. Loan repayments can be reported to credit bureaus so borrowers can build good credit. But that wouldn’t help someone in immediate need, the site says.

The website Lending Circlesfinanced by the San Francisco-based nonprofit Mission Asset Fund, includes the names and contact numbers of loan groups across the country, and a person can find one by entering a zip code.

Got a tip on business or investigative stories? Contact the reporter at craig.harris@usatoday.com or 602-509-3613 or on Twitter @CraigHarrisUSAT or linkedin.com/in/craig-harris-70024030/

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