Choose payday loan lender wisely

Choose payday loan lender wisely

July 31, 2020 Off By administrator

For the millions of Americans who struggle to afford an unexpected expense, high-interest payday and online loans may seem like acceptable options despite the inherent risk.

But guidance issued by federal regulators in the spring could bring a competitor to small-dollar lending: banks. The guidance omits a previous suggestion from the Federal Deposit Insurance Corp. that loans from banks should have annual percentage rates of 36 percent or lower.

While some consumer advocates say a rate cap is a necessary consumer protection, researchers say banks can check a borrower’s credit and offer affordable loans — something payday lenders whose APRs often reach above 300 percent typically don’t do.

If your only option is a high-interest loan, no matter the source, take control by understanding the rate and monthly payments and choosing a lender that checks your ability to repay.

Understand your rate to calculate payment

There is no federal interest rate cap on small loans of a couple thousand dollars or less, and bank regulators can’t impose one. But 45 states cap APRs on $500 loans, while 42 states have caps on $2,000 loans. Check the National Consumer Law Center’s fact sheet to see the APR cap in your state.

The NCLC advocates for a federal 36 percent rate cap. Associate Director Lauren Saunders said without one, high rates could permeate other credit products. Many lenders that offer APRs of 36 percent or lower tie your rate to how risky it is to lend to you, based on your credit history. If you’ve had trouble making loan or credit card payments in the past, the lender may see you as a high-risk borrower and assign a rate close to 36 percent.

APRs are useful for comparing loan products, but seeing dollar amounts can help consumers evaluate whether they can make the required payments on an installment loan, said Alex Horowitz, senior research officer with The Pew Charitable Trusts.

If the only loan you can qualify for has a rate higher than 36 percent, calculating the monthly payments can help you understand what you can afford. A bank would have to charge $50 to $60 on a $400 loan repaid over three months to make it profitable, Horowitz said. That’s an APR of 75 percent to 90 percent. A 2017 study from Pew found many consumers think that’s a fair rate.

Small-dollar lending is currently dominated by online lenders, said Leonard Chanin, deputy to the chairman at the FDIC.

But U.S. Bank’s “Simple Loan” offers a rare example. The loan usually has an APR of about 71 percent. Borrowers with autopay pay a $12 fee for every $100 borrowed and repay the loan over three months.

Chicago-based online lender OppLoans provides loans to borrowers with bad credit and has APRs as high as 160 percent in some states. CEO Jared Kaplan said it’s costlier for his…

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