What consumers need to know about high cost loans
By Marla Williams and David Tarpley, Legal Aid Society
It’s an expensive time of year for many of us. From gifts, trees and decorations, to food and other expenses, holiday spending can push budgets to the limit.
For some Tennessees, it may seem like the only option to cover that shortfall is to take out an emergency cash loan. But the disadvantages of these loans often far outweigh the advantages, costing borrowers far more than expected and trapping them in an endless cycle of debt. This is because the costs associated with these loans are often so exorbitant that it would be impossible for a normal person to repay them. Some might say it’s by design.
Here in Tennessee, the most common types of high-cost consumer loans in Tennessee are:
- Securities lending, legalized in 1995, which allow customers to take out a small loan using their car as collateral. Once the loan is paid off, the borrower regains title to his car, but if he is unable to repay the principal and the high interest, he risks losing his car.
- Payday loans, legalized in 1997, which give customers a short-term cash advance in exchange for sending a post-dated check to the creditor for the full amount of principal and interest they owe – which may also be excessive. If the amount is not repaid, the creditor can sue the borrower, which can result in liens on their property and even wage garnishment. Although the law sets limits on the number and amount of payday loans a person can have at any given time, lenders often ignore these limits.
- Flexible loans, legalized in 2010, which offer customers an open line of credit, usually up to $4,000. Borrowers who are approved can withdraw any amount up to their maximum limit at any time – and sometimes even more. As with other forms of high-cost loans, the annual percentage rate is several times that of traditional lenders, prompting many customers to borrow additional money to pay off the original loan.
In recent years, flexible loans have overtaken other types of high-cost loans in popularity, in part due to a sustained advertising campaign. If you are used to watching the news early in the morning, you will see many announcements from creditors who provide flexible loans. They are usually presented in the same way – how easy they are to get, how they save you from life’s troubles.
What they don’t tell you in these ads is how expensive these loans are and how aggressive lenders can be in pursuing borrowers who don’t repay their loans.
Under Tennessee law, the state legislature sets limits on interest rates and other fees assessed in most consumer loans. The main exception to this rule is credit cards issued by banks. For most consumer loans, interest is only one of the allowable charges and is usually not the largest charge. For example, for flexible loans, the interest rate can be 24% per year, and the so-called “customary” charges up to 255% per year, for a total annual rate of 279%. What ultimately matters is the cost of the loan when interest and other fees are all included. The cost of the loan will vary somewhat depending on the type of loan, the amount borrowed and the term of the loan, but all of these loans are very costly for the borrower to repay.
If a borrower defaults on their loan, lenders often go to great lengths to get their money back. We had a client who couldn’t access his monthly Social Security benefits the morning they were deposited into his bank account because the payday lenders had already shown up to cash the post-dated checks he had written.
If borrowers owe money to a high-cost lender that they are unable to repay, their options are unfortunately quite limited. But they must understand that by continuing to renew their existing loan, they are only making the situation worse.
We cannot ethically advise people not to pay a legal debt. However, we can inform them of the consequences of making this choice. Lenders often threaten legal action if a loan is not repaid – and often leave borrowers in limbo as to whether the penalties they might face are criminal or civil. A common threat borrowers hear is “if you don’t pay, we’ll get a warrant.”
It is important for borrowers to know that if a lender threatens a warrant, they are referring to a civil warrant – the beginning of a civil action in court. Failure to pay a civil debt may have legal consequences, but will not result in criminal prosecution. Moreover, in the case of flexible loans, default by the borrower should immediately stop the accumulation of usual charges by the lender, thus reducing the amount that the borrower will ultimately have to repay.
At the Legal Aid Society, we are not financial advisers. We don’t advise people how to get out of debt. However, for those facing legal action from high cost lenders, we may be able to help and in some situations soften the limits of what they are experiencing. For those facing legal action, we often defend these cases when we spot legal issues that could be used to dismiss the case or reduce client liability. We can help exempt assets from being seized to pay a judgment or help set up a court-protected payment plan to pay off the judgment while avoiding garnishment. In certain worst-case scenarios, we may be able to help with a bankruptcy.