Predatory Lending

Demographic of Small-Dollar-Credit Consumers
Small-dollar-credit (SDC) refers to services offered by payday and title loan industries.
In 2012, a study was conducted by the Center for Financial Services Innovation.
According to the study, SDC consumers are generally less educated, have more
children, and are based in the South, where there is a greater concentration of
unbanked or underbanked people. In addition, there’s a healthy spread of SDC
consumers with a range of salaries—showing 20% of SDC consumers have a
household income between $50,000 and $75,000. However, 45% of respondents to the
survey would classify themselves as “poor”.
Controversy
In a BBC article, a spokesman for a company offering short-term loans says that APR is
not a valid model when assessing costs associated with short-term subprime loans, and
that the charges are appropriate for the convenience of quickly obtaining a short-term
loan. Instead, the APR model is better for assessing costs associated with a middle- or
long-term loan options.
The high interest rates on title loans are justified by defenders of the industry, stating
that the higher interest rates are necessary for the lending companies to turn profit. The
borrowers are considered "high risk" and may default on their debt. Therefore, the
higher interest rates are a means of securing profit even if the borrower defaults, and
ensures the company sees a positive rate of return.
Criticism
Critics of title loans contend that the business model seeks and traps impoverished
individuals with ridiculous interest rates by lenders who aren’t entirely transparent
regarding the payments. This practice lends confusion and so some borrowers are
unaware of the situation that getting a small-dollar-credit loan puts them in. However,
they are already locked in the loan and have no means of escaping other than paying
the loan off or losing their vehicle.
The practice has been compared to loan sharking, because the interest rates are so
high.
Even though states are placing stringent restrictions on things like interest rates that can
be charged, regulating the practices of companies offering short-term loans, like payday
loans or title loans, proves to be a difficult endeavor. The Consumer Financial
Protection Bureau and the Federal Trade Commission, both federal regulatory agencies
responsible for enforcing federal law with non-banking institutions, admit that they do
not have the authority to enforce the Military Lending Act, which states that military
members and their families can pay an APR no higher than 36%, while banning loans to
service members that would be secured through their banking accounts, vehicles, or
paychecks.
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