How to spot predatory lending

Payday loans are on the rise, with more than 2.6 million taken out in Missouri last year.
Sunday, March 20, 2005 | 12:00 a.m. CST; updated 7:52 p.m. CDT, Sunday, July 20, 2008

Nine characteristics of predatory lending

1. Triple-digit interest rate

Payday loans carry very low risk of loss, but lenders typically charge fees equal to 400 percent APR and higher.

2. Short minimum loan term

About 75 percent of customers can’t repay their loan within two weeks and must get a loan “rollover” at additional cost.

3. Single balloon payment

Payday loans do not allow for installment payments to be made during the loan term. Borrowers must pay the whole loan back at the end of two weeks.

4. Loan flipping (extensions, rollovers or back-to-back transactions)

Payday lenders earn most of their profit by making multiple loans to cash-strapped borrowers. Ninety percent of the industry’s revenue growth comes from making more and larger loans to the same customers.

5. Simultaneous borrowing from multiple lenders

Trapped on the “debt treadmill,” many consumers get a loan from one payday lender to repay another. The result: no more cash, just more fees.

6. No consideration of borrower’s ability to repay

Payday lenders encourage consumers to borrow the maximum allowed, regardless of the customer’s credit history. If the borrower cannot repay the loan, lending companies are able to collect renewal fees several times.

7. Deferred check mechanism

Consumers who cannot make good on a deferred (post-dated) check covering a payday loan can be assessed multiple late fees and insufficient funds charges or fear criminal prosecution for writing a “bad check.”

8. Mandatory arbitration clause

By eliminating the borrower’s right to sue for abusive lending practices, these clauses work to the benefit of payday lenders over consumers.

9. No restrictions on out-of-state banks violating state laws

Federal banking laws were not enacted to enable payday lenders to circumvent state laws.

— Source: The Center For Responsible Lending

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