What is a Payday or Title Loan?
Executive Summary
- Payday or title loans are high interest and highly deceptive loans that are a form of banking exploitation.
Introduction
A form of predatory lending, the objective is to obtain such usurious interest from borrowers that they are forced into debt peonage.
As demonstrated above, this can and usually does go on for months and years, with the borrower paying $50 in fees every two weeks just for the original loan amount. If continued for a year, the borrower will have paid $1,300 in interest in exchange for the use of $300 in cash.In those states where payday lending is prohibited, title loans take their place. Title loans emerged in the 1990s and are essentially payday loans secured by collateral—the title to the borrower’s car. (The loans are often configured this way in order to avoid prohibitions on payday lending.) With title loans, not only do borrowers pay extremely high interest rates, but they also stand to lose what is perhaps their most valuable asset: their car.
Source: How the Other Half Banks
Approximately 8,138 car title lenders operate in twenty-one states and generate nearly $2 billion in loans annually, with borrowers paying more than $4 billion in fees.48 In states where they are not expressly authorized, lenders are able to operate through loopholes in the law.49Because title lenders can rely on the threat of repossession, the majority of borrowers repeatedly renew their loans, turning what is described as a short-term loan into long-term, high-cost debt requiring borrowers to pay more than twice in interest than what they received in credit.
Source: How the Other Half Banks
And for many, incomes have gotten less predictable, as well. Since the 1970s, household incomes have become much more volatile and yet household bills have remained constant. “More than 30 percent of Americans reported spikes and dips in their incomes. Among that group, 42 percent cited an irregular work schedule; an additional 27 percent blamed a span of joblessness or seasonal work.”
Source: How the Other Half Banks
The primitive hands-on processing and tawdry exterior of the outlets both exude welcome to poor customers and mask [the firm’s] close ties to and substantial financing from large corporations and big banks.”94 This is another critical, and somewhat ironic, aspect of the alternative financial service industry’s success: its ability to take advantage of the federally sponsored banking system, using its access to clearinghouses and even its banking charters to lend.
Source: How the Other Half Banks
Many states have chosen to not regulate payday loans or to set high maximum APRs. In fact, the maximum rates allowed by law have steadily increased over the last decade, with rates ranging from a 300 percent APR to a 1900 percent APR.95 These APRs significantly exceed the rates allowed by credit card companies and banks.
Source: How the Other Half Banks
For many years, payday lenders skirted these rules by “renting bank charters” from banks in states with high usury rates and operating from another state. Payday loan companies partnered with banks in states with no usury laws or very high interest rate ceilings, like South Dakota or Delaware. When banking regulators put an end to this practice a decade ago, payday lenders seeking to avoid usury limits fled to Native American reservations or offshore regulatory havens like Malta. Today, many payday lenders operate on the Internet and can charter in the states with the highest interest rate ceilings. These lenders are the most usurious (with average rates of 650 percent), the most complained about, and the hardest to regulate. Research conducted by Pew has also shown higher instances of fraud and abuse by online lenders.Because usury law is primarily a state matter, the enforcement of rules has also varied among the states. New York State has been particularly active and has even indicted payday lenders under state criminal laws that prohibit usury of over 25 percent.99 Payday lenders chartered in other states and offshore islands were providing loans to New York residents at interest rates of over 500 percent. The New York State attorney general charged these firms with criminal violations in 2014. However, this level of enforcement activity is incredibly rare and hits only the most brazen and egregious lenders who seem to willfully flout state laws.
Source: How the Other Half Banks
These interest rates levels are an outrage and it is a nearly undiscussed issue.