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Protections from Predatory Short-Term Loans

Overview

Predatory lending strips wealth from financially vulnerable families and leaves them with fewer resources to devote to building assets and climbing the economic ladder. Three of the most prolific and wealth-stripping short-term loan products are payday loans, car-title loans and abusive installment loans. Lenders of these products often charge exorbitant fees and interest rates, lend without regard to borrowers’ ability to repay, continually refinance loans over a short period of time, and commit outright fraud and deception. States have the power to regulate predatory short-term lending by prohibiting predatory loans, capping them at 36% APR, and strengthening state Unfair and Deceptive Acts and Practices (UDAP) statutes.

Policy Ratings

To see state-by-state policy data, click here.

Elements of a Strong Policy

Based on the Center for Responsible Lending’s and National Consumer Law Center’s expertise and work in the field of responsible lending policy, CFED considers a state’s predatory small dollar lending policies strong if they meet the following criteria:

1. Does the state protect consumers from payday lending? States should protect consumers by prohibiting payday lending altogether or imposing an APR cap of 36% or less.
2. Does the state protect consumers from car-title lending? State should protect consumers by prohibiting car-title lending altogether or imposing an APR cap of 36% or less.¹
3. Does the state protect consumers from predatory short-term installment loans? States should impose an APR cap of 36% or less on $500, 6-month unsecured installment loans. ²
4. Does the state include short-term lending in basic consumer protection laws? States should ensure that their Unfair and Deceptive Acts and Practices statutes cover predatory short-term lending.

Footnotes

1. APR calculations are based on a $300, one-month car-title loans, as this is the most common type of car-title loans and it is the loan examined by NCLC in the Small Dollar Loan Scorecard.
2. CFED examines the $500, 6-month loans because most states have tiered pricing systems for small dollar installment loans that vary by the size of the loans.