What you need to know about high cost loans
- Marla K. Williams is the managing attorney for the Legal Aid Society’s Cookeville office and is also the lead consumer practice attorney.
- David Tarpley is an attorney with the Nashville Office and has practiced practically in the area of consumer law.
Between gifts, trees, decorations, food and other expenses associated with the holidays, the end of the year can turn into a Spending Whirlwind. Now, as we head out of the holiday season, the bills are coming due and some Tennessees are understandably concerned about how they’re going to pay for it all.
For some, it may seem like the only option to cover that financial shortfall is to take out an emergency cash loan. But the downsides of these loans often outweigh the benefits, costing borrowers far more than expected and trapping them in an endless cycle of debt.
This is because the costs associated with these loans are often so exorbitant that it would be impossible for a normal person to repay them. Some might say it’s by design.
Here in Tennessee, the most common types of high cost consumer loans in Tennessee are:
- Title loans, legalized in 1995, which allow customers to take out a small loan using their car as collateral. Once the loan is paid off, the borrower regains title to his car, but if he is unable to repay the principal and the high interest, he risks losing his car.
- Payday loans, legalized in 1997, which give customers a short-term cash advance in exchange for a post-dated check to the creditor for the full amount of principal and interest they owe are also excessive. If the amount is not repaid, the creditor can take the borrower to court, potentially resulting in liens against their property and even wage garnishment. Although the law sets limits on the numbers and dollars of payday loans a person can have at one time, lenders often ignore these limits.
- Flexible loans, legalized in 2010, which provide customers with an open line of credit, typically up to $4,000. Approved borrowers can withdraw any amount up to their maximum limit at any time – and occasionally even more. As with other forms of high cost loans, the annual percentage rate is often higher than those of traditional lenders – prompting many customers to borrow additional money to pay off the original loan.
In recent years, flexible loans have overtaken other types of high-priced loans in popularity, in part due to a sustained publicity push. If you like the habit of watching morning news, you’ll see lots of ads from creditors who do Flex Loans. They are usually thrown the same way – how easy they are to get, how they will save you from life’s troubles.
What they don’t tell you in these ads is how expensive these loans are and how aggressive lenders can be in pursuing borrowers who don’t repay their loans.
What they don’t tell you about interest rates
For most consumer loans, interest is only one of the permitted charges and is usually not the largest charge. For example, for flexible loans, the interest rate can be 24% per annum, and the so-called “customer fee” up to 255% per annum, for a total annual rate of 279%.
What matters in the end is the cost of the loan when interest and other charges are all included. The cost of the loan will vary somewhat depending on the type of loan, the amount borrowed and the term of the loan, but all of these loans are very costly for the borrower to repay.
If a borrower defaults on their loan, lenders often go to great lengths to get their money back. We had a client unable to access his monthly Social Security benefits the morning they were deposited into his bank account because payday lenders had already shown post-dated after-sales checks he had written.
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If borrowers owe money to a high-cost lender that they are unable to repay, their options are unfortunately quite limited. But they must understand that by continuing to renew their existing loan, they are only making the situation worse.
We cannot ethically tell people not to pay a legal debt. However, we can inform them of the consequences of making this choice. Lenders will often threaten legal action if a loan is not repaid – and often leave borrowers unclear whether the penalties they might face are criminal or civil. A common threat borrowers hear is “if you don’t pay, we’ll get a warrant.”
It is important for borrowers to know that if a lender threatens a mandate, they are referring to a civil mandate – the beginning of a civil action in court. Civil debt default may have legal consequences, but will not result in criminal charges. Moreover, in the case of flexible loans, default by the borrower should immediately stop the accumulation of usual fees by the lender, thus reducing the amount that the borrower will ultimately have to repay.
At the Legal Aid Society, we are not financial advisers. We don’t advise people how to get out of debt. However, for those facing lawsuits from broad-priced lenders, we may be able to help and in some situations soften the edges of how they feel.
For those facing legal action, we often defend these cases when we spot legal issues that could be used to dismiss the case or reduce client liability. We can help exempt assets from being seized to pay a judgment or help set up a court-protected payment plan to pay off the judgment while avoiding garnishment. In some worst case scenarios, we may be able to help with bankruptcy.
Please contact us at 800-238-1443 or visit www.las.org for more information on how we might be able to help.
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About the Legal Aid Society
The Middle Tennessee and Cumberlands Legal Aid Society advocates equity and justice under the law. The nonprofit law firm provides free civil legal representation and educational programs to help people in its area receive justice, protect their well-being, and support opportunities to overcome poverty.
It serves 48 counties from offices in Clarksville, Columbia, Cookeville, Gallatin, Murfreesboro, Nashville, Oak Ridge and Tullahoma. The Legal Aid Society is funded in part by United Way. Learn more about www.las.org, or by following the company on Facebook.
Marla K. Williams is the managing attorney for the Legal Aid Society’s Cookeville office and is also the lead consumer practice attorney. David Tarpley is an attorney with the Nashville Office and has practiced practically in the area of consumer law.