Fringe Loan | Definition

According to a report by the Center for Responsible Lending, payday lenders are nearly eight times as concentrated in African American and Latino neighborhoods than compared to white neighborhoods. Unfortunately, payday lenders drain almost $247 million in fees annually from African American and Latino communities.

What is the Fringe Banking Industry? 

The fringe banking industry refers to payday loan businesses, pawn shops, title loan companies, and any other financial institution that charges its customer's high-interest rates on their services.

Fringe Loans: An Overview of Predatory Lending Practices

Typically, the term “fringe loan” is referred to as a high-interest rate loan. Predatory loans, also known as fringe loans, are frequently provided to borrowers who are having trouble getting loans from conventional lenders like banks or credit unions. These loans are risky for people who need urgent cash since they have high-interest rates and fees that can keep borrowers in a cycle of debt. 

Fringe bankers generally prey on the financially excluded, including low-income communities that do not have access to common financial services like a bank account (checking and savings), credit, and other traditional banking services.

Who Uses Fringe Loans?

People who are struggling financially and don't have many other options are frequently marketed to about fringe loans. People with bad credit histories or those without access to conventional lenders frequently use these loans. 

African Americans, Latinos, and low-income individuals are more likely to use fringe loans than other groups, according to a report by the Center for Responsible Lending. The three main reasons people use fringe loans are due to unexpected costs, medical needs, and emergencies. Additionally, some people use fringe loans to pay for recurring costs like rent, groceries, and transportation.

Recommended Read: 12 Types of Predatory Loans

Types of Fringe Loans

Borrowers can choose from a variety of fringe loans. While each loan type has its terms and conditions, all involve predatory lending techniques. The following are a few of the most typical kinds of fringe loans:

• Payday loans: These are short-term loans that the borrower must repay on his or her following payday. Only a small amount is typically borrowed, and the interest rates are extremely high. The average payday loan has an annual percentage rate (APR) of 391%, according to the Consumer Financial Protection Bureau (CFPB).
• Car title loans: The borrower's vehicle serves as collateral for these loans. The value of the vehicle determines the loan amount, and the borrower is required to have a clean title to the vehicle. The lender may take back the vehicle if the borrower defaults on the loan.
• Pawnshop loans: The borrower's personal property serves as security for these loans. The pawnshop grants the borrower a loan depending on the value of the valuable item they bring in, such as jewelry or electronics. The pawnshop has the right to keep the item if the borrower defaults on the loan.

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Payday loans and installment loans are similar in that the borrower has a longer period of time to repay the debt. The repayment time is typically short, a few months, and the interest rates are still very expensive.

Risks Associated with Fringe Loans

Fringe loan customers should be aware of a number of hazards associated with these loans. High-interest rates and fees pose the most risk. Borrowers may find it challenging to repay these loans because of the high-interest rates, which can reach 300% or higher.

The brief repayment time is an additional risk. In case they are already having financial difficulties, borrowers may find it challenging to return the loan within a few weeks or months. Borrowers who are unable to pay back their loans may be subject to automatic rollovers, which can result in further debt.

Finally, there are predatory lenders who exploit borrowers by using unfair loan tactics. These lenders may offer loans with concealed costs or employ forceful collection strategies to get borrowers to make payments.

Recommended Read: What is a Payday Loan?

Alternatives to Fringe Loans

Before making a choice regarding a fringe loan, it's crucial to consider all of your options. Here are some substitutes to take into account:

• Credit counseling: Nonprofit credit counseling organizations can offer assistance with budgeting and debt management. They can also assist in negotiating lower interest rates and costs with creditors.
• Personal loans from respectable lenders: Compared to fringe loans, personal loans from reputable lenders have lower interest rates and longer repayment terms. Before accepting a loan, comparing lenders and carefully reviewing the terms and conditions is crucial.

Loans, savings accounts, and other financial services are provided by credit unions, which are nonprofit financial organizations. In comparison to traditional banks, they frequently charge lower interest rates and fees.

Recommended Read: The Reality Behind the Predatory Economy

The Money Wrap-Up

For borrowers who are already having financial difficulties, fringe loans can be a risky choice. Because of the high-interest rates and brief repayment terms, borrowers may find it challenging to escape a debt cycle. 

Before accepting a fringe loan, you should look into alternatives, including credit counseling, personal loans from trustworthy lenders, and credit unions. 

Reach out to a nonprofit credit counseling organization or advocacy group for assistance if you have already taken out a fringe loan but are having trouble paying it back. Keep in mind that there are tools at your disposal to manage your debt and enhance your financial status.