The Truth About Predatory Lending

About 12 million people in the United States turn to some form of predatory lending each year, trapping them in a cycle of financial insecurity. Those at or below the poverty line are especially vulnerable.

Due to the problematic nature of predatory lending, the Catholic Charities of Kansas City-St. Joseph Employment Services program is updating its Financial Literacy course to include a special segment on this topic.

By definition, predatory lending is a practice imposing unfair or exorbitant loan terms on a borrower. At times, these practices are abusive as, encouraging a borrower to accept terms that are excessive and deceptive.

There are three types of predatory lending:

1. Subprime Loans: Subprime borrowers are people who do not have financial stability. Unlike prime borrowers who have good credit, income, and collateral, subprime borrowers are financially insecure, have bad credit, are bankrupt, and often have no or low-paying jobs. Subprime loans involve risk for everybody. The loans have less likelihood of repayment, so lenders charge more interest. You can recognize advertisements for subprime loans, as they promise to approve loans for those with bankruptcies, no credit, and bad credit.
2. Payday loans: A payday loan is an advance on one’s paycheck accompanied by interest rates as high as 400%. Most states have laws in place to protect people from payday loans, limiting the amount and length of time of the loan. Some even limit the amount of fees that can be charged. In Missouri, a person can borrow up to $500, and can be charged up to $75 per $100 in a 2-week period. This doesn’t really sound that bad, but the APR calculates out to a whopping 1980%. This loan can also be rolled over up to six times. These loans can have long-term, devastating financial consequences.
3. Check cashing: Check cashing organizations allow checks to be cashed for a fee or percentage of the check. They often provide other services on site to make the store more inviting or convenient for customers. Many check cashing stores provide loans, similar in nature and process to payday loans.

We have probably all heard stories about how predatory lending is destructive and how it preys on those who are desperate. Most are repeat customers and know the risks of using these financial partners. The potential for catastrophe is indisputable. So, why do 12 million Americans continue to get into these situations?

Upon doing research, we came across an eye-opening video by PBS NewsHour called Breaking the Bank.

It features Lisa Servon from the University of Pennsylvania. Servon worked for four months as a teller in a check cashing facility, then wrote a book called The Unbanking of America. Servon found those who use predatory lending often do so for reasons as practical, urgent and critical as putting food on the table.

They need quick solutions and often fail to think through long-term consequences. Imagine being a single parent and not making enough money to feed your family or provide clothing or medical care. A major car repair or a medical emergency can make predatory lending seem like a lifeboat, and the urgency of the current situation quickly overshadows any potential consequences. It really becomes a matter of survival.

Here at Catholic Charities, we are in daily contact with people suffering from financial difficulties and are dealing with debt. We strive to provide coaching and referrals so that people can have long term answers and solutions. With our Financial Literacy classes, we teach clients the basic principles of managing money and income.

To learn more about our Financial Literacy classes, contact Dionne Blake at dblake@ccharities.com or (816) 659-8258.