Wallets Beware: Predatory Lending

Wikipedia defines predatory lending as "unconscionable lending practices that take advantage of vulnerable borrowers". While there are some APR guides in determining predatory status they are generally loans secured by real estate or automobiles where the total loan payment represents greater than 50% of the monthly after-tax income. In short, they are situations where the lender offers money under the expection of it defaulting. When a loan defaults the lender gains ownership of the collateral (i.e. car title).

One common example of a predatory loan is a Pay Day loan. This loan is granted without a credit check or collateral for a small amount of money (less than $2000 and often for as little as $100) over a short period of time (generally two weeks). The borrower gives the company a post dated check for the principle plus a fee equivalent to the state maximum APR.

In Ohio the maximum interest rate on a two week loan is 390%. So for every $100 borrowed the company is given $115 in the form of a post-dated check. At the end of the two weeks the borrower can (a) pay of the loan in full or (b) allow the check to be cashed. It is understood that the borrower does not have the $115 in the account on the date written, but it expected to be present at the end of the borrowing period.

According to Randy Ludlow of the Cincinnati Post (Payday Loan Abuses) there were ~400 lawsuits by lenders against borrowers in Ohio courts. Because of the nature of the business checks are often written on insufficient funds and Ohio law allows for prosecution under the "hot check" law. If found guilty the borrowers are liable for the original loan, original loan fee, damages equivalent to triple the loan amount, court costs, and 10% interest until paid. The $100 example becomes $410.

Wikipedia's discussion of Pay Day loans compares several other high rates:

• $100 pawn with 20% service fee= 240% APR;
• $100 payday advance with $15 fee= 391% APR;
• $100 bounced check with $48 NSF/merchant fees = 1,251% APR;
• $100 credit card balance with $26 late fee (assumes 25% interest) = 678% APR
  
• $100 payday advance with [sample] Ohio judgement = 3,100% APR