Tribal Loans | Definition/ˈtrīb(ə)l lōns/
Tribal loans are loans offered by lenders based on tribal land. They are also referred to as Indian loans or reservation loans.
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Most tribal loans charge extremely high interest rates, making it much more difficult for the borrower to pay their loan back.
Predatory lending is misleading borrowers into unfair and abusive loan terms. In addition, these types of loans carry higher than average fees and interest rates.
Borrowers are coerced into loans with enticing offers such as low payments and extended loan repayment dates. Predatory lenders often target minorities, the elderly, people with low credit scores, and anyone that is financially uneducated.
Two forms of predatory lending are payday loans and tribal loans.
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What are Tribal Loans?
Tribal loans are loans offered by lenders based on tribal land. They are also referred to as Indian loans or reservation loans. Although tribal lenders must be a member of a Native American tribe, loans are open to both tribal and non-tribal borrowers.
Due to their ties to Native American tribes, tribal lenders can set their terms and interest rates without worrying about state regulation. In addition, the United States Constitution recognizes tribal lands as sovereign nations. Sovereign nations mean that native territories are free to govern themselves.
Federal and tribal laws are often less strict and extensive than consumer protections upheld by state regulators. As a result, borrowing money from a tribe could be very risky.
Tribal loans are short-term, high-interest rates loans and are often approved and funded online.
Tribal loan borrowers often find it more challenging to have their loans dismissed if they have to file for bankruptcy, refinance, or assert their rights when lenders demand payment.
Pros and Cons of Tribal Loans
Tribal loans are easy to get approved for. They don't require a particular credit score nor proof of actual income to be reported. Once approved, you can access cash quickly. They do not review your eligibility and ability to repay, which can be a good and bad thing.
These loans, unlike payday loans, offer more significant loan amounts: no credit check and instant approval.
If you fail to repay the loan, the lender can take you to court. If the judgment favors the lender, they can garnish your wages. You have rights as a borrower. Lenders must follow regulations set by the Federal Trade Commission and Consumer Finance Protection Bureau.
Tribal payday loan lenders operating on Native land are not subject to state financial laws, which frequently strictly regulate traditional payday loans. Tribal regulations and federal payday laws, on the other hand, are poorly enforced. As a result, tribal payday loans are not technically illegal, but many of their practices are.
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A payday loan is a short-term, high-cost loan, generally, of less than $500, that is typically due on your next payday. The high interest charged on a payday loan makes it difficult for borrowers to repay. According to the Federal Trade Commission, payday loans typically charge an annual percentage rate of 390%.
In exchange for funds, borrowers are supposed to write a post-dated check and authorize payday lenders to submit it on their next payday electronically.
If a borrower fails to pay off the loan in full on payday, new interest fees accrue, and their balance plus the new interest fees are rolled over until the following payday. Fees don't stop just because a borrower can't afford to repay the loan. This is how borrowers end up in a never-ending payday loan cycle.
Many lenders face problems because many customers fail to make a payment on their next payday because they can't afford it. Another issue is that customers fail to understand the terms and conditions of the loan.
Difference Between Tribal and Payday Loans
Though payday and tribal loans are similar, borrowers face greater risk with tribal loans. They charge significantly higher interest rates than traditional payday loans because they are not required to follow state laws. Because of the high-interest rates charged on these loans, these financing options should not be seen as a long-term financial solution.
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Why States Should Cap Interest Rates & Fees
According to the Consumer Finance Protection Bureau (CFPB), many state laws limit payday loan fees to between $10 and $30 for every $100 borrowed. Therefore, a typical two-week payday loan with a fee of $15 per $100 equates to an annual percentage rate (APR) of nearly 400%. These rates are compared to the annual percentage rates on credit cards which range between 12%-30%.
Some states protect consumers by capping interest rates and fees that come with predatory lending. But, for the states that don't, predatory lenders flock to the area to take over. Their abusive loan tactics push the good lenders out of business and tie consumers into a never-ending debt cycle.
Caps on interest rates and fees serve to benefit the borrower. It makes loan products and services more appealing and less hassle when repaying. Without rate caps, lenders are at a higher risk of borrowers defaulting on payment terms. Thus the beauty of rate caps helps to ensure lenders that payments are more affordable and can be made on time throughout the life of the loan.
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Protecting Yourself From Predatory Lenders
Tribal and payday lenders are trained to trick borrowers into applying for loans. Many payday loan companies deceive borrowers about repayment terms, interest rates, and other vital aspects of the loan. A select few are truthful about the loan's characteristics but present the information deceptively, leading borrowers to believe the loan is easier to repay than it is.
Before signing documents for a payday loan, ensure you understand everything about the loan. Ask questions and read the fine print. Avoid any loans that require balloon payments. If you feel you are being talked into a loan you did not ask for, it is probably because you are.
Aside from high fees and interest rates, some common red flags of predatory lending are:
- Guaranteeing approvals without credit checks and verifying applicant information through national databases
- Lenders rush through loan products and paperwork, leaving you little time to think before applying.
- Leaving empty spaces on documents.
In addition, lenders will sometimes fill in open areas on documents after you sign them with their terms, giving them the upper hand in the event you may default on the loan. As the borrower, your signature has been provided even though you are unaware of the filled-in terms. Predatory lenders practice unfair and unethical business daily. They have no remorse for borrowers needing the money to make it until the next payday.
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The Money Wrap-Up
Taking control of your finances is a risk that you will want to take. If you are stuck in a tribal or payday loan, make a strict plan to get out and stay out. It will be challenging, but it is possible. First, pay more than the minimum amount required on the loan until the loan is repaid in full. Then, order your free credit report and clean up your credit score. Having a good credit score makes it easier to get approved for loans through your bank or credit union.
Make sure that you budget accordingly and have money set aside for a rainy day. You do not want to pay high-interest rates on loans when unexpected emergencies, car repair bills, or medical care bills because you do not have enough money set aside to cover these costs. Therefore, to minimize your chances of having to take out a payday or tribal loan to cover these expenses, try to make a budgeting plan that you can stick to.
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