Washington, D.C. — A new report released today by the Center for American Progress highlights the economic dangers of high-cost, short-term payday and auto title loans and proposes a means of transition toward safer credit alternatives for vulnerable families.
“All too often, consumers find that the loan they thought would solve their problems only makes things worse,” said Joe Valenti, author of the report and CAP’s Director of Asset Building. “We hope that the research and recommendations outlined in this report foster both better regulation and better credit alternatives for financially vulnerable consumers in this time of economic uncertainty.”
Twenty-seven percent of Americans have no emergency savings. Two out of five families report that they would “probably not” or “certainly not” be able to come up with $2,000 in 30 days in the event of a financial emergency. Because so many Americans are financially strapped, many families may turn to high-cost, short-term loans in response to financial setbacks. While these solutions may fill immediate needs, in the long run they are extremely expensive for borrowers and perpetuate a cycle of debt.
According to the report, predatory storefront lenders are currently legal in 36 states, and their numerous locations are mainly clustered throughout low-income neighborhoods. Although about one-third of all states have capped rates on small-dollar, short-term loans to prevent them from reaching abusive levels, many states have looser provisions. Internet lending also presents threats to financially vulnerable consumers. This is a growing issue for both state and federal lawmakers, as the Pentagon noted in a 2006 report acknowledging the effects of these loans on members of the military.
The report makes clear the current dangers of predatory payday and auto title loans and supports greater regulation and enforcement to better protect consumers. Valenti argues that states and the federal government should ban high-cost lending practices and that state and local agencies should also improve data collection and consider using zoning authority to limit the lenders’ scope. The report further encourages regulators, policymakers, and financial institutions to develop short-term loan alternatives through public and private options to provide improved options for vulnerable borrowers moving forward.
Read the report: Encouraging Responsible Credit for Financially Vulnerable Consumers by Joe Valenti
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