What Consumers Should Know About Expensive Loans
Written by Marla Williams and David Tarpley
Legal Aid Society
Nashville, TN – It’s an expensive time of year for many of us. Between gifts, trees and decorations, food and other expenses, the cost of the holiday season can push the budget.
To some Tenneseers, it may seem like the only way to cover this financial bottleneck is to take out an emergency cash loan. But the disadvantages of these loans often far outweigh the advantages, which costs borrowers much more than expected and keeps them trapped in an endless debt cycle. Because the costs associated with these loans are often so exorbitant that they cannot be repaid by a normal person. Some might say this is intentional.
Here in Tennessee, the most common types of expensive consumer loans in Tennessee are:
- Title Loans, which was legalized in 1995 and allows customers to take out a small loan with their car as collateral. Once the loan is repaid, the borrower gets the title of their car back, but if they can’t repay the principal and high interest rates, they can lose their car.
- Payday loan, legalized in 1997, that gives customers a short-term cash advance when they write a post-dated check to the creditor for the full amount of principal and interest owed – which can also be excessive. If the amount is not paid back, the creditor can take the borrower to court, potentially resulting in a lien on their property and even a wage garnishment. Although the law limits the number and dollar amount of payday loans a person can have at one time, lenders often disregard those limits.
- Flex loan, which was legalized in 2010 and offers customers 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 more. As with the other costly loans, the annual percentage is many times higher than traditional lenders – causing many customers to borrow extra money to repay the original loan.
In recent years, flexible lending has grown in popularity, in part due to an ongoing surge in advertising. If you are used to seeing the early morning news, you will see numerous ads from creditors giving flexible loans. They are generally set up in the same way – how easy they are to get, how they save you from life’s troubles.
What they fail to tell you in these commercials is how expensive these loans are and how aggressive lenders can be in tracking down borrowers who fail to repay their loans.
Under Tennessee law, state lawmakers set the interest caps on interest and other fees that are applied to most consumer loans. The biggest exception is credit cards issued by banks. For most consumer loans, interest is just one of the allowable burdens, and typically not the largest.
In the case of flex loans, for example, the interest rate can be 24% per year, the so-called “usual fee” even 255% per year, with a total annual interest rate of 279%. What matters in the end is the cost of the loan when all interest and other fees are included. The cost of the loan varies depending on the type of loan, the amount borrowed and the length of the loan, but all of these loans are very expensive for the borrower.
When a borrower fails to pay back their loan, lenders often go to great lengths to get their money back. We had a client who didn’t have access to his monthly Social Security benefits the morning he was added to his bank account because payday lenders had already turned up to cash out postdated checks he’d written.
Unfortunately, when borrowers owe an expensive lender money that they cannot repay, their options are very limited. But they should understand that if they continue to extend their existing loan, they will only make the situation worse.
We cannot ethically advise people not to pay legal debts. However, we can point them out on the consequences of this choice. Lenders often threaten legal action if a loan is not repaid – often leaving borrowers unclear as to whether they are facing criminal or civil sanctions. A common threat borrowers hear is “If you don’t pay, we’ll get an arrest warrant”.
It is important for borrowers to know that a threat of an arrest warrant is an arrest warrant – the initiation of a civil lawsuit in court. Failure to comply with a civil law claim may have legal ramifications, but will not result in a criminal charge.
Additionally, in the case of flex loans, borrower default should immediately stop the lender’s accumulation of the usual fee and reduce the amount that the borrower ultimately has to repay.
At Legal Aid Society, we are not financial advisors. We don’t advise people how to get out of debt. However, for those facing legal action from expensive lenders, we may be able to help and in some situations mitigate the edges of their experience.
For those facing legal action, we often defend these cases when we discover legal issues that could be used to dismiss the case or reduce the client’s liability. We can help exempt property from seizure to settle a judgment, or set up a court-protected payment schedule to settle the judgment while avoiding attachment. In some worst-case scenarios, we may be able to help with a bankruptcy.
Please contact us at 800.238.1443 or visit www.las.org for more information on how we may be able to help.
About the authors
Marla K. Williams is the executive attorney for the Cookeville office of the Legal Aid Society and also the senior attorney for consumer practice.
David Tarpley is an attorney in the Nashville office and has practiced extensively in the field of consumer law.
About the Society for Legal Aid
The Legal Aid Society of Middle Tennessee and the Cumberlands advocates fairness and justice within the law. The not-for-profit law firm offers free civil representation and educational programs to help bring people justice, protect their well-being, and support opportunities to overcome poverty in their area.
It serves 48 counties from offices in Clarksville, Columbia, Cookeville, Gallatin, Murfreesboro, Nashville, Oak Ridge, and Tullahoma.
The Legal Aid Society is partially funded by United Way. Learn more at www.las.org, or by following the company on Facebook.