The Cumulative Costs of Predatory Practices

Cumulative Impact
At best, the costs of lending abuses are isolated to a single loan that is paid off with capped (albeit
excessive) costs borne by the borrower. However, the costs of predatory lending can also compound.
As described in this chapter, many borrowers face excessive fees or interest rates, an inescapable
cycle of debt, lost opportunities for wealth-building, and impaired credit from defaults brought about
by an abusive loan. They may see costs compound as the use of one predatory loan product spurs the
use of yet another abusive loan. And if their communities are particular targets for predatory lending,
they—and future generations—face a disproportionate impact compared with other communities.
Figure 15 shows a theoretical—but completely likely—example of costs compounding for a
borrower. In this case, a payday loan borrower pays excessive fees and interest and becomes caught
in a debt trap, incurring high immediate costs. The borrower is overwhelmed and, attempting to
stay afloat, takes out a car-title loan to pay off the payday loan, incurring additional costs resulting
from loan-stacking. Ultimately, the borrower defaults and loses his or her car, a critical asset for
getting to and from work. This example highlights why focusing only at the immediate cost of the
fee paid on the initial loan significantly underestimates the costs this abusive loan ultimately caused
for the borrower.
As described previously, certain populations and communities are more likely to receive loans with
abusive features of all types. This creates another form of cumulative impact. For example, because
of new mortgage lending laws, abusive subprime mortgages are largely gone from today’s mortgage
market. However, the locations where these loans were most highly concentrated in the 2000s also
have high concentrations of payday loans today. In addition, the populations that were most likely
to receive abusive subprime loans a decade ago are also those most likely to receive loans with
other abusive features today. In this way, the costs of one kind of abusive lending follow on the
costs of previous lending abuses. Over time, communities struggle to get ahead as they bear
compounding costs.
Figure 15: Example of Compounding Costs for Borrowers
$
$
$
$
Excessive Fees
and Interest:
This borrower takes
out a payday loan and
pays the high fees and
interest associated
with this product.
Debt Trap:
The borrower cannot pay
back the loan and afford
his regular expenses.
As a result, he gets
trapped in a cycle of
loans, reborrowing the
principal and paying
the fee over and over.
Loan Stacking:
In order to get out of the
payday loan cycle, the
borrower takes out
a car-title loan.
Costs of Default:
Ultimately the borrower
defaults on the cartitle
loan and his car
is repossessed.
Center for Responsible Lending 29