This blog has periodically covered the dangers of payday loans. Payday loans charge extremely high interest rates and often leave borrowers deep in debt. Sources show that the average consumer who takes on a payday loan is in debt for over 6 months, is charged an annual interest rate of over 400%, and has to extend the original payday loan 9 times. There is almost never a situation in which a consumer in need should turn to a payday lender for fast cash.
There are a number of alternative options when consumers need cash or need to pay down existing debt. Those alternatives include setting up a payment plan with creditors, salary advances, credit counseling, credit union loans, emergency assistance programs, and — as a last resort — credit card cash advances. As this blog has shown, taking out a payday loan will almost always leave consumers in deeper debt than before taking out the loan.
There are many individuals and organizations trying to educate consumers on the danger of payday loans, and deter consumers from taking on payday loan debt. Many state governments, including Colorado, have passed laws that limit the interest rate payday lenders can charge. These laws are an attempt to protect consumers from predatory financial products. While the Colorado law has helped consumers to some extent, the industry continues to grow and 77% of Coloradans still live within 5 miles of a payday lender.
Many states have recognized the problem with payday loans and are addressing the issue through laws and regulations. However, some of these payday lenders have adapted their business model in an attempt to make sure they don’t have to comply with the law. The new business models create a type of payday lender in disguise – they essentially function like a payday lender and offer extremely high interest rates without having to comply with payday loan laws. The following are a few examples of loans to be careful of:
- Auto title loans: Also known as a car title loan, this is a loan where the borrowers car is used as collateral. This means that if the borrower does not make loan payments on time then the lender can repossess the borrowers car and sell it in order to repay the borrowers debt. Similar to payday lenders, auto title lenders often charge extremely high rates of interest to borrowers.
- Tribal affiliated loans: Due to the increase in regulation many payday lenders have started partnering with Indian tribes in order to offer payday loans over the Internet. By partnering with Indian tribes many of these lenders do not have to comply with US law. Partnering with Indian tribes is a way for these payday lenders to keep taking advantage of consumers by charging excessive interest rates.
- Mobile Home Loans: Recently, reports have uncovered unfair lending practices by mobile home manufacturers. Such reports have found that loan terms have included high interest rates, undisclosed fees, and terms that would make selling or refinancing the home impossible. As always, before financing the purchase of a mobile home consumers should talk to financial professionals they trust and not just the sellers of the mobile home.