What consumers need to know about high cost loans
By Marla Williams and David Tarpley, Legal Aid Society
It is an expensive time of year for many of us. Between gifts, trees and decorations, food and other expenses, the costs of the holiday season can push budgets to the limit.
For some Tennesséens, it may seem that the only option to cover this shortfall is to take out an emergency cash loan. But the drawbacks of these loans often far outweigh the benefits, costing borrowers far more than expected and locking them into a never-ending cycle of debt. This is because the costs associated with these loans are often so outrageous that it would be impossible for any 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 allows customers to take out a small loan using their car as collateral. After the loan is paid off, the borrower gets back the title to his car, but if he is unable to repay the principal and high interest, he risks losing his car.
- Payday loans, legalized in 1997, which give clients a short-term cash advance in exchange for a post-dated check to the creditor for the full amount of principal and interest they owe – which can also be excessive. If the amount is not repaid, the creditor can sue the borrower, which can lead to liens on their property and even wage garnishment. Although the law sets limits on the number and dollar amounts of payday loans a person can have at one time, lenders often ignore these limits.
- Flexible loans, legalized in 2010, which offer customers an open line of credit, typically up to $ 4,000. Borrowers who are approved can withdraw any amount up to their maximum limit at any time – and sometimes more. As with other forms of high cost loans, the annual percentage rate is several times higher than that of traditional lenders, leading many customers to borrow extra 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 a lot of advertisements from creditors giving flexible loans. They’re usually presented the same way – how easy they are to get, how they save you from life issues.
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 fail to repay their loans.
Under Tennessee law, the state legislature sets rate limits on interest and other charges assessed in most consumer loans. The main exception to this is credit cards issued by banks. For most consumer loans, interest is only one of the allowable charges and is usually not the most significant charge. For example, for flexible loans, the interest rate can be 24% per annum, and the “usual charges” up to 255% per annum, for a total annual rate of 279%. What ultimately matters is the cost of the loan when interest and other charges are all included. The cost of the loan will vary somewhat depending on the type of loan, the amount borrowed and the length of the loan, but all of these loans are very expensive for the borrower to repay.
If a borrower doesn’t repay their loan, lenders often go to great lengths to get their money back. We had a client who was unable to access his monthly Social Security benefits the morning they were deposited into his bank account because payday lenders had already shown up to cash the post-dated checks he had drafted.
If borrowers owe an expensive lender money that they are unable to repay, their options are unfortunately quite limited. But they need to understand that by continuing to renew their existing loan, they only make the situation worse.
We cannot ethically advise people not to pay a legal debt. However, we can inform them of the consequences of this choice. Lenders often threaten legal action if a loan is not repaid – and often leave it unclear to borrowers whether the penalties they might incur are criminal or civil. A common threat borrowers hear is “if you don’t pay, we’ll get a money order.”
It is important for borrowers to know that if a lender threatens a mandate, it is referring to a civil mandate – the start of a civil action in court. Failure to pay a civil debt may have legal consequences, but will not result in criminal prosecution. In addition, in the case of flexible loans, the borrower’s default should immediately put an end to the lender’s accumulation of usual fees, thereby reducing the amount that the borrower will eventually have to repay.
At Legal Aid Society, we are not financial advisers. We don’t advise people how to get out of debt. However, for those who face lawsuits from expensive lenders, we may be able to help and in some situations soften the edges of what they are going through. For those facing legal action, we often defend these cases when we spot legal issues that could be used to have the case dismissed or reduce the client’s liability. We can help exempt property from garnishment to pay for a judgment or help set up a court-protected payment plan to pay the judgment while avoiding garnishment. In some of the worst case scenarios, we may be able to help with bankruptcy.