The Need to Encourage Responsible Credit

Exploring how stronger laws and enforcement can reduce debt traps in short-term lending.

Part of a Series

idea light bulbMillions of Americans are financially vulnerable. Yet the credit options available to borrowers in some cases reduce their financial security even more.

The story of Susan Fronczak, a 60-year-old Arizona woman, demonstrates how expensive and risky consumer credit can be. She borrowed $2,000 from an auto title lender—a company that makes loans pledged by a car title and a spare set of keys—at a 182 percent annual interest rate, under an agreement that would cost her at least $3,860 to pay back the $2,000 loan. Ultimately, she could not afford the monthly payments, and her car was repossessed. By the time she was able to get her car back, she had paid more than $5,000 to the lender.

Unfortunately, many Americans could easily end up in Fronczak’s shoes. Twenty-seven percent of Americans report that they have no emergency savings at all. Roughly two out of every five American families indicate that they would “probably not” or “certainly not” be able to come up with $2,000 in 30 days to deal with an emergency, according to the 2012 National Financial Capability Study. For Latinos, African Americans, and young people ages 18 to 34, this rises to half of all families. Of families in the bottom third of the income distribution, 68 percent said they would be unable to come up with the money in an emergency.

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