Payday loans are one of the most commonly cited examples of predatory lending because they have high fees and short repayment terms. The payday loan industry lends billions of dollars a year in small, high-cost loans as a bridge to the next payday. Borrowers can use loans from financial institutions such as PAL, personal loans, credit card balance transfers and HELOC as options to get out of their debt situation. The high fees associated with some types of loans could make it difficult for people to repay their loans on time.
An example of predatory online lending is if a loan agreement had a hugely high and potentially fraudulent interest rate, such as 300% or more. Sixteen states in Arizona, Arkansas, Colorado, Connecticut, Georgia, Maryland, Massachusetts, New Jersey, Montana, New Hampshire, New York, North Carolina, Pennsylvania, South Dakota, Vermont and West Virginia, and the District of Columbia have absolute bans on extremely high-cost payday loans. The check bounced and both your bank and payday lender charged you additional fees for insufficient funds. Even after controlling credit scores and other risk factors, such as loan-to-value (LTV) ratios, subordinated liens, and debt-to-income ratios (DTI), data show that African-Americans and Latinos were more likely to receive subprime loans at higher costs.
Predatory lenders often use unfair, abusive or illegal tactics to persuade borrowers to commit to their loans. In the 16 states that allow title loans that require lump sum payments instead of allowing borrowers to repay these loans in installments, lenders would have had to assess whether a borrower could repay the loan before granting it. TILA, for example, requires payday lenders, like other financial institutions, to disclose the cost of loans to borrowers, including financial charges and APR. Oversight of payday loans has largely been left to states, although federal laws provide some protection to borrowers.
A lender who waives a credit check before offering you a loan does not evaluate how you have handled your debts in the past or the potential impact of getting more debt. As a graduate student in the Triangle area of North Carolina, Allen King* found it very difficult to repay the four payday loans he had accumulated, as lenders did not offer installment plans. He worked down the street from the payday store, and since he was short on money, he called to see what he needed to get a loan. During that time, she juggled ten payday lenders, spending her lunch hour moving from one lender to the next scrambling through the various loans.