The Southern Poverty Law Center (SPLC) has produced a new booklet titled Easy Money, Impossible Debt: How Predatory Lending Traps Alabama’s Poor. This publication does an excellent job of explaining how lenders who offer so called “payday loans” and “title loans” take advantage of weak regulations surrounding small-dollar loans. Some folks feel that these lenders are operating a business, like any other, and that the people who take out loans with them are doing so by their own choice. So what is the problem? Isn’t it the goal of a business to make money?
The problem is that these businesses are actually designed to trap low-income borrowers into a cycle of debt. Everything about the way the predatory lenders are structured is designed to lend more money than a person can afford, encourage them or trick them into paying only on the interest – thereby never actually reducing the principal or paying off the loan – and force them into rolling the loan over again and again.
These predatory lenders are able to take advantage of the folks taking out these loans who are either desperate or who simply don’t understand how the loans work, or both. Some customers diligently make payments on a small loan over time, only to find out they have spent hundreds or even thousands of dollars without making a dent in the principal they owe. A man who operates a payday and title loan business even admits in the booklet, “To be honest, it’s an entrapment – it’s to trap you.”
A payday lender can approve someone to borrow up to 30 percent of his or her paycheck. The money must be repaid to the lender – plus 17.5 percent interest – in two weeks, or basically when the person receives his next paycheck. It must be paid in full. For a title loan or title pawn, as it also is called, a lender and borrower agree on a loan amount based on the value of the borrower’s car. The borrower provides the lender with his car title as collateral, but keeps driving his car, for the time being. This loan must be paid in full, plus 25 percent interest, in 30 days. The loan must be paid in full.
Unfortunately, most of these borrowers are in dire straits in the first place. Pew Charitable Trust research shows 69 percent of these clients borrow the money to pay everyday expenses. If they have to borrow money to buy things like groceries, or pay a medical bill, or pay their rent, where is the money going to come from to pay back a loan with interest? Well, the answer is, they usually can’t. This is exactly what the lender is counting on.
People with payday loans snowball into multiple rollovers and multiple loans, with ever-increasing payments that will never go toward paying down the actual principal. People with title loans find their cars are repossessed by the lender, who often resells the vehicle at a price greater than the value of the loan and pockets the difference.
The SPLC reports low-income families and individuals end up paying effective annual interest rates of 456 percent for payday loans and 300 percent for title loans. Borrowers are lured in by the promise of a quick solution to their immediate financial problem, but they end up taking the first step into an avalanche of greater debt. They put their trust in these lenders, and believe there must be rules and regulations in place to protect them as consumers. But predatory lenders have no incentives to act as a responsible lender would. They actually benefit from taking advantage of their clients.
The SPLC outlines a number of safeguards lawmakers must put into place in order to prevent predatory lending. These include placing limits on the annual interest rates that can be charged, allowing a minimum repayment period of 90 days, requiring lenders to return surplus money obtained in the sale of repossessed vehicles to the borrower, and creating incentives for savings and small-loan products, among other measures.
History shows that in states that have cracked down on this type of predatory lending, predatory lenders leave the market and borrowers find other, safer avenues for paying their debts. Responsible lending grows up in its place. Our readers are encouraged to get a copy of this eye-opening publication and learn more about payday and title loans, and how they damage communities and families. Talking to legislators about how to change the climate for predatory lenders in Alabama is also needed. We can make this a place where these loan sharks can’t operate as they currently do.
The booklets are being distributed free of charge to individuals, legislators, consumer groups, community organizations, and government agencies such as the Consumer Financial Protection Bureau. For more information or to get a copy of the report, contact the SPLC at 334-956-8200 or visit them online at www. splcenter.org.
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