PREDATORY LENDING PRACTICES
Predatory lending practices seriously threaten the economic security of Virginia’s families. Low-income family heads are more likely to be desperate enough to take a loan from a predatory lender and less likely to be able to pay back the loan. Two types of predatory lending are payday loans and car title loans. Families are at risk of losing their car and even their homes because of predatory loan practices.
Payday Lending
Payday lending is the practice of using a check as collateral for a two-week loan. To qualify, borrowers need a checking account and a steady income from a job or Social Security. To get a loan, a borrower gives a payday lender a personal check. In return, they receive cash, minus the lender's fees, which are $15 for every $100 borrowed. For example, with a $300 payday loan, a consumer pays $45 in fees and gets only $255 in cash. A recent study by the Center for Responsible Lending reports that the average payday loan customer pays $800 to borrow only $325.
Since the passage of the 2002 Payday Loan Act, over 850 payday loan vendors have opened in Virginia. This is more than 2 payday loan shops for every McDonald’s. Last year, more than 90,000 Virginians took out more than 13 payday loans from the same lender. Many borrowers ended up borrowing again to pay back previous loans, putting them in an inescapable trap of loans and debt. Some interest rates on payday loans are as much as 380%.
Especially concerning in Virginia due to a high military population, the Department of Defense cites research showing military personnel are three or four times more likely to be payday borrowers than civilians. Payday lenders cluster around military bases in order to take advantage of the youth, financial needs and concentrated housing of military families.
Car Title Lending
Car title loans are illegal in Virginia, but out-of-state car title lenders are exploiting a loophole in Virginia’s laws to make these loans in Virginia. With no credit check, a borrower can quickly obtain a short term loan by exchanging their car title and an extra set of keys to their vehicle as collateral. Most borrowers are barely able to make monthly interest payments and after only several attempts, most owe more than the amount they borrowed. While the loan can be paid off early with no penalty, the vehicle can be repossessed with only one missed payment. There are an estimated 150 car title lenders operating in Virginia and are typically charging 360% interest rates. The car title lenders have avoided interest rate limitations by making the loan look like “open-end” credit, or like credit cards. Open-end credit was deregulated in Virginia but the legislature has never decided that secured small loans should be deregulated.
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