United States and the Curse of Predatory Lending
Predatory Lending, also colloquially known as loan sharking is a bad business model. This business has always been run by anti-social elements and even mafia syndicates right from the age of the Renaissance. The loans were granted without any formal process. The recoveries were done in the dark alleys, and the entire operation was far beyond the arm of the law.
However, about twenty years ago, all this changed! Loan sharks became reputable companies in the United States. They started obtaining licenses as short-term lenders. In almost no time, these companies have spread far and wide. Today, there are more predatory lenders in the United States than there are McDonald's outlets! Loan sharking is alive and kicking in the most developed nation in the world.
How has this anomaly come into existence? How is it that the land of the free is falling prey to one of the oldest forms of enslavement?
In this article, we will have a closer look at the rise of predatory lenders and their ability to circumvent the law.
What is Predatory Lending ?
Predatory lending is lending which is aimed at the eventual financial destruction of the borrower. The aim of these lenders is to trick people into signing up for loans with usurious interest rates. The rest of the life of the borrowers is then spent making payments. In essence, predatory lending is a lot like slavery apart from the fact that it is still legal in the United States.
Most of these predatory lenders call themselves payday loan companies. This means that they give short term loans to people who need money instantly for medical requirements or such other requirements. The problem is that they charge interest rates which range from about 400% to 1900%!
Therefore, if a person were to borrow $100 from these loan sharks, they would be expected to pay somewhere between $500 to $2000 to settle the loan at the end of the year. At this rate, they would never be able to pay off the loan and be stuck in a perpetual debt trap. This is the business model of many of these companies.
How Predatory Lenders Justify These Interest Rates
It is strange that American law has allowed such loan sharking on its soil. However, these companies have created a compelling legal case. The first argument that they present is that these loans are short term in nature. They are typically due on the next payday i.e. within a month and therefore annual percentage rates do not apply to them. The lenders claim that the cost of marketing and finding consumers is extremely high and therefore fees are charged to cover these expenses. They argue that converting this into an annual figure is misleading since no one holds on to a short-term loan for a year or more!
Also, they regularly dismiss any illegal activities stating that dangerous elements are present in every business. This is not unique to payday lending and therefore is a problem of law enforcement rather than a problem of payday lending!
The Rise of Payday Loans
If you were to consider the ground reality of payday lenders, there is no doubt that they purposely indulge in predatory lending.
- Re-borrowing Rate: For instance, consider the fact that most people who take payday loans end up in a cycle of debt. They pay off one loan only to take out another one. Hence, the annual percentage rates stated above are relevant to a lot more people than the predatory lender's state.
- Fees and Charges: Also, if people fall behind on their payments, the fees and interest that is charged is simply outrageous. A lot of these charges are not considered while calculating the notional APR. Hence, the applicable rate of interest for many people may still be higher!
Predatory Lending and Regulation
As more and more people were ripped off by payday loans, there has been a huge outrage. As a result, attempts have been made to bring stringent regulation to payday lending industry. However, these attempts at bringing about regulation have been thwarted.
- Prevention: Predatory lenders have spent a lot of money buying influence. Some of these lenders have former members of Congress employed as their lobbyists. Also, a lot of officials and politicians have been given out franchises of the business at extremely favorable terms. As a result, there is very less political will to regulate these loan sharks.
- Circumventing Regulation: In cases, where states have indeed imposed strict regulations, the predatory lenders have shown their expertise in circumventing such rules. For instance, if loans less than 90 days were regulated, these companies start giving out 91 day loans! Also, if unsecured loans are regulated, they start attaching securities such as house or car to make these loans. In many cases, mortgage loans were given out for as little as $400. The loan was actually a payday loan but was disguised as a mortgage to avoid the regulation.
To sum it up, predatory lenders still exist in the United States. They market their products aggressively, and it seems like they are immune to regulation. The only way to prevent thousands of people from these businesses is to educate them.
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