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Student loans for bad credit — here are your best options

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There are many student loan options for bad credit borrowers. Learn about them here, including federal loans and private loans. (iStock)

Many students need to borrow money to complete their education, but you may be worried about your ability to do that if you have a low credit score or no credit history.

The good news is, your imperfect credit shouldn’t deter you as there are many options for student loans for bad credit. In fact, depending on your situation, you should likely be able to qualify for federal student loans at an affordable rate as well as for private student loans either with or without a cosigner.

While it may take a little extra effort to find the loan that’s right for you, it’s worth exploring the loans available to you so a lack of financing doesn’t derail your efforts to achieve your academic goals. Here are some of your best options.

Private student loans

While some private lenders require cosigners for borrowers who have low credit or no credit history, not all do. In fact, there are private loan lenders that cater to bad credit borrowers and that are willing to look at other metrics such as your job prospects after graduation.

You can explore these options by visiting Credible to see which lenders may be open to providing you with an affordable loan even with your current credit report.

8 OF THE BEST PRIVATE STUDENT LOANS IN 2020

Private student loans with a cosigner

Private student loans don’t offer the same borrower benefits as federal student loans, but they can still be a good option if you have exhausted eligibility for federal aid. However, private lenders generally have stricter credit and income requirements for who can qualify.

If you have a low credit score, one of the best ways to get an affordable private student loan is to apply with a cosigner. A cosigner with a better credit score could make it possible for you to obtain a loan you’d otherwise be denied or to get a much better interest rate so borrowing becomes more affordable.

You can visit Credible to view a rates table so you can compare fixed and variable interest rates from multiple private student loan lenders at once to see how much borrowing will cost you.

You can also use an online student loan calculator to determine both monthly payments and total repayment costs at different interest rates.

HOW TO FIND A COSIGNER FOR A LOAN

Federal student loans

Federal student loans are the best option for borrowers with imperfect credit because your credit score doesn’t matter for most loan types.

Direct Subsidized Loans and Direct Unsubsidized Loans are available regardless of your credit history at low fixed rates that are the same for every borrower each academic year. You can also qualify for a Direct Consolidation Loan regardless of credit, which allows you to group multiple existing federal student loans into one new loan with more flexible repayment options.

CORONAVIRUS STUDENT LOAN INTEREST WAIVERS BEING OFFERED — HOW TO TAKE ADVANTAGE

Direct PLUS Loans are another federal loan option, but while these aren’t available if you have adverse credit, there’s a very specific definition of what that means. “Adverse credit” includes having outstanding debts with a combined balance of $2,085 or higher that are at least 90 days delinquent or in collections or having a foreclosure, repossession, bankruptcy, tax lien, default, wage garnishment, or write-off of federal student debt within the past five years. And even if you have black marks on your record that qualify you as having adverse credit, you could still obtain a PLUS loan if you document extenuating circumstances or find an endorser without these issues.

To obtain any of the federal student loans available to bad credit borrowers, you’ll need to complete your Free Application for Federal Student Aid (FAFSA). There are annual and lifetime borrowing limits for subsidized and unsubsidized loans. Subsidized loans also require you to show financial need, although neither of the other two types of federal aid are means-tested.

Finding the best student loans for your situation

While there are opportunities to find student loans for bad credit borrowers, improving your credit score can open up the door to borrowing with your choice of lenders and may enable you to get more affordable rates on private student loans.

3 WAYS TO TACKLE PRIVATE STUDENT LOANS IF YOU CAN’T PAY DUE TO CORONAVIRUS

You can boost your score by paying your bills on time, making sure your credit report is free of errors and keeping your credit card balances low.

The sooner you develop a positive payment history, the easier it will be to borrow not just for school but for anything you need to get your career started after graduation.

3 THINGS TO KNOW BEFORE BORROWING FOR COLLEGE

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Loans Bad Credit Online – 7 Top Online Car Buying Sites | Fintech Zoom

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Top online car buying sites

Carvana

Pros

  • Choose delivery or pickup
  • Seven-day return policy with up to three swaps
  • 100-day limited warranty

Cons

  • Must purchase extended warranty before delivery or pickup
  • Financing terms are nonnegotiable

Carvana is an online vehicle retailer with more than 25,000 used cars for sale at the time of publishing. Each car goes through a 150-point inspection and comes with a free CARFAX report. In-house financing is available, but you can also pay cash or finance with a third party, such as your bank or credit union. Carvana also accepts trade-ins, and it can pick up your trade-in at a location of your choice if you opt for delivery.

Carvana offers a seven-day test drive and return policy, and its cars come with a 100-day, 4,189-mile limited warranty. Available options include an extended warranty plan and gap coverage.

Edmunds

Edmunds

Pros

  • Pricing insights help ensure you’re getting a good deal
  • Supports AutoCheck vehicle history reports

Cons

  • Doesn’t sell cars directly

Edmunds doesn’t sell cars directly, but it hosts listings for new and used cars from local dealers. You can shop based on a number of factors, including Edmunds’ own pricing insights, to help you identify a good deal.

Edmunds also offers a variety of car buying resources, including rankings, reviews, a price checker and an online car appraisal service. Its appraisal service is particularly useful if you’re trying to sell your existing car or wondering what you can get for it as a trade-in.

CarMax

CarMax

Pros

  • Finances people with most credit profiles
  • 30-day return policy

Cons

  • No cars more than four years old

CarMax sells used cars online, letting you shop by budget, car type or monthly payment. Curbside pickup and delivery options are available. CarMax also offers 24-hour test drives and 30-day, money-back returns (if you’ve driven less than 1,500 miles). All major systems are covered for 90 days or 4,000 miles.

CarMax provides financing through several lenders, including Ally, Capital One, Chase and Exeter Finance. However, you can handle your own financing through your bank or credit union if you prefer. If you find better financing after you complete your purchase, CarMax has a three-day pay-off program that lets you take advantage of a better deal.

Autotrader

Autotrader

Pros

  • Broad search coverage
  • Trade-in option available for online purchases

Cons

  • Doesn’t sell directly
  • Possible delivery fees for online purchases

Autotrader lists used and new cars for sale online from local dealers and private sellers. In some cases, the dealer will bring you the car for a test drive and deliver the paperwork and car to your home when you’re ready to buy. Autotrader also provides instant cash offers for your current vehicle.

Autotrader has an accelerated online process that lets you expedite the sale, secure financing, value your trade-in, apply for financing and schedule a test drive before visiting a dealership.

Vroom

Vroom

Pros

  • Can file DMV paperwork for you
  • Seven-day test-drive

Cons

  • Some purchases require paper documents
  • Delivery could take 10 to 14 days

Vroom offers a completely online car buying and delivery experience, specializing in low-mileage used cars. It also lets you test-drive vehicles for seven days. Cars on Vroom must pass multiple inspections, and every car comes with a free CARFAX report. Vroom provides a limited warranty with most purchases, covering the car for 90 days or up to 6,000 miles.

You can supply your own financing, but Vroom also provides its own lending options by partnering with banks and lending institutions, including Chase, Santander Bank and Ally. Vroom accepts trade-ins too.

AutoTempest

AutoTempest

Pros

  • Search millions of car listings on one site
  • Helps you sell or trade in your current vehicle

AutoTempest brings together listings from other used car sites, including eBay, Cars.com, TrueCar, Carvana and CarsDirect. You can find millions of used car listings and shop by budget, make, model, year, mileage and other factors. AutoTempest also offers three advanced keyword search options to help narrow your search by negative keywords, optional words or phrases.

If you’re looking for a new car, AutoTempest can help you compare quotes from multiple dealers. Other buying tools include insurance and shipping quotes. Financing is available through Carvana.

You can also sell your car on AutoTempest. You get a real offer in two minutes, and Auto Tempest picks up your car when you decide to sell. Payment is available upfront or as part of a trade-in agreement.

CarsDirect

CarsDirect

Pros

  • Search thousands of local listings
  • Find updated pricing insights

CarsDirect helps buyers find deals on new and used cars for sale from local dealers. You can compare cars side by side and check deals in your area. You can also browse by price, style, make, model, region and monthly payment. CarsDirect also has a section for top deals on new cars and leases.

CarsDirect helps find financing options for buyers with bad credit, no credit and bankruptcy. Most cars come with a free CARFAX report.

How we found the best online car buying companies

To find companies for this guide, we looked at 15 brands and pared them down to these seven top online car buying sites. We considered available vehicle options, financing offerings and return policies. We also looked at reviews from online sources, including ConsumerAffairs and Google, and we only included companies with a rating of 3 stars or higher.

Compare online car buying websites

ProviderOffers financingAvailabilityReturn policy
CarvanaYesFree delivery to 31 states; paid delivery elsewhere7 days
EdmundsNoExclusively onlineVaries by seller
CarMaxYes41 states30 days
AutotraderNoExclusively onlineVaries by seller
VroomYesDelivers to 48 states7 days or 250 miles
AutoTempestNoExclusively onlineVaries by seller
CarsDirectYesExclusively onlineVaries by seller

Online car buying vs. traditional car buying

The main difference between buying a car online and in person is that you may not be able to see the car with your own eyes or take a test drive before making the purchase. To make up for this, many online car purchases come with a return policy, typically five to seven days (with limited mileage).

Like cars from a dealership, new cars purchased online should come with a mechanical inspection and warranty. However, dealerships might offer certified pre-owned vehicles with a manufacturer’s warranty — these cars might not be available from online car buying sites or private sellers. Some online car sellers also accept trade-ins, and many offer common dealer features, including financing options and add-ons like extended warranties and gap insurance.

How to buy a car online

Buying a car online is a new experience for a lot of people, but the process usually isn’t too different from buying at a dealership. Here’s a step-by-step guide to buying a car online:

  1. Find out your credit score: If you plan to finance the vehicle, look up your credit score so you won’t be surprised when the lender performs a credit check. This also helps you know what kind of interest rate to expect.
  2. Determine your budget: Setting a budget helps narrow your search by identifying which cars you can afford and giving you an estimate of what your monthly payment should be.
  3. Find the right vehicle: Figure out which model years fit your budget and your needs. Compare your options, then search a variety of online car buying sites to find a vehicle matching your criteria.
  4. Look for deals or incentives: Check for deals from the seller or search the internet for financing incentives or manufacturer promotions, such as 0% financing or trade-in deals.
  5. Get preapproved: Once you have a car in mind, you can get preapproved for financing through a lender or, in some cases, the car buying site itself. Some online sellers will put a hold on a car while you work out the details of your financing. While getting financing through the seller or dealership is an option, preapproval has multiple benefits, like letting you shop around for a better rate.
  6. Talk with a sales manager: Having a conversation with a sales manager helps you answer any questions you might have. It should also give you an explanation of the online buying process from that company. Let the sales manager tell you about any deals or incentives available, but don’t commit if you’re not sure yet.
  7. Take the car for a test drive: If a test drive option is available, schedule one. It might be at a dealership, or the seller may bring the car to you. With a new car, you shouldn’t have to carefully check for damage or malfunctions, but it’s still important to get a feel for the car and see how you like it. If the test drive goes well and you have your finances together, it’s time to buy.
  8. Read and sign the paperwork: When you’re ready to make a purchase, be sure to read all the paperwork before signing. Make sure you’re only paying for what you want and getting everything that you’re paying for. If you don’t understand anything in your contract, ask about it. Some online sellers accommodate e-signatures, while others will overnight paper documents for your signature.
  9. Head to the dealer or get your car delivered: Once you sign the contract, the dealer should deliver the car or arrange for you to pick it up locally. If you’re buying from a private party, you may have to arrange your own auto transport.

Tips for buying a new car

If you are planning to purchase a new vehicle, here are some tips worth considering:

  • Get insurance quotes: Think about the cost of insurance as well as your monthly payment. Insuring a new car is typically more expensive than insuring a used car. Shop around for rates on the make and model you’re considering to find out what you should expect to spend.
  • Plan for fuel costs: If you’re looking at a new car online, the gas mileage should be listed with the specs on the vehicle. If not, check the manufacturer’s website. Calculate your weekly gas costs to make sure the vehicle is right for you.
  • Check the warranty: Online car sellers should offer the same warranties as physical dealerships. Find out what the manufacturer’s warranty covers. Powertrain or drivetrain coverage is standard, but most new car warranties should also have bumper-to-bumper protection. Roadside assistance is sometimes included too.
  • Plan ahead: Some car dealers offer maintenance packages with the purchase of a new car, such as free basic service up to a certain number of years or miles. Dealerships may also try to sell you an extended warranty that covers your vehicle against malfunctions and breakdowns. These can be worth the cost, but you should also consider working with third-party warranty providers.

Tips for buying a used car

While buying a used car has much in common with buying a new car, there are several notable differences to keep in mind. Here are a few tips if you’re purchasing a used car online.

  • Get a vehicle history report: Many online car sellers offer free vehicle history reports. If not, these reports are readily available for a low cost from such sites as CARFAX or AutoCheck. Enter the VIN to find out about any accidents, recalls or maintenance gaps that may affect the car’s value. Some reports will also show how many previous owners a car has.
  • Make sure the car is in good shape: Online sellers should be able to verify that a vehicle’s maintenance is up to date, whether it’s through a vehicle history report or physical records from a previous owner. Many sellers also have a certification process that includes maintenance and a multipoint inspection. If the seller is willing, you can also get a pre-purchase inspection from a third-party mechanic.
  • Take a test drive: If a test drive is available, don’t pass it up. Look for any dings, paint damage, glass cracks and imperfections that might not have been in the listing photos. Inspect the engine bay, check the tire tread and try all the power features to make sure they work. Check for strange smells, leaks or sounds as well.
  • Consider the gas mileage: Information about the gas mileage of used cars is more difficult to find. As a rule of thumb, gas mileage gets worse as a car ages, so expect to spend more on fuel than you would for a new version of the same vehicle. You can get an estimate of a car’s actual gas mileage from the U.S. Department of Energy. Think about how much gas will cost for the vehicle now and in the future as its efficiency decreases.
  • Verify the title is clear: A clean title is good, but a salvage title means the car was declared a total loss by an insurance company and repaired. Though the car was repaired and it’s possibly in drivable condition, it could still have problems. Its value should also be significantly lower if it doesn’t have a clear title. This information is usually available via a vehicle history report.
  • Talk to the seller: When purchasing a car online from a dealership, it helps to talk with the sales manager or customer service. Ask questions about the inspection process, test drive, financing and return policy.

Bottom line

Online car buying is convenient and lets you search thousands of listings, compare prices and arrange financing without leaving home. If you decide to purchase a used car online, do the research and make sure the car’s title is clear. If a test drive is not available before you buy, make sure you have some recourse, like a return policy. Finally, understand all the fees and costs associated with the vehicle before signing on the dotted line, just as you would for any car purchase.

Frequently Asked Questions about online car buying

It depends on your situation and preferences. There are many websites that can help you buy a car, and some offer more functionalities than others. To get started, look for a site with a lot of listings that lets you filter by the features that are most important to you.

Yes, it is possible to buy a car completely online. With online car buying sites, you can go from finding the right vehicle to purchasing entirely online. However, it’s still a good idea to see the car in person and ensure everything is correct if you can.

Yes, it is generally safe to purchase a vehicle online. However, you want to ensure you’re on a legitimate website. Be sure to read terms and conditions, privacy policies and other “fine print” materials before handing over your information online. Also, be careful with wiring funds or handing over your credit card details to someone you do not know online.



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Loans Bad Credit Online – Sasfin profit drops on increased y/y credit impairment provisions | Fintech Zoom

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Loans Bad Credit Online – Sasfin profit drops on increased y/y credit impairment provisions

NOMPU SIZIBA: Specialist financial services player Sasfin Bank released half-year results. For the six months ended December 2020, the company reported a decline in total income of 1.5% at R633 million, while headline earnings were down 65.8% at R26.9 million – and the board will not be giving shareholders an interim dividend this time around. The company attributes the decline in profit to an increase in year-on-year impairment provisions, and the generally adverse economic effects brought about by the pandemic.


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Well, to discuss the results further, I’m joined on the line by Michael Sassoon. He’s the CEO at Sasfin. Thanks very much, Michael, for joining us. You saw a decline in your profits; has the Covid experience proved quite adverse for the group?

MICHAEL SASSOON: Yes, very much so. You know, we have two businesses. The wealth-management business has actually done very well under Covid owing to markets being strong. But our banking business, where we really lend to businesses in South Africa, has taken some increased credit provisions, and this has resulted in the huge drop in  profits.

NOMPU SIZIBA: I do see that your loans and advances, for example, contracted quite a lot –  by over 13%. I suppose it just speaks to the lack of activity and the lack of risk-taking among businesses.

MICHAEL SASSOON: I think that’s right. I think that when business confidence is low, people who are business entrepreneurs buy less stock, they invest less in their businesses, which means that the demand for credit has dropped to some degree. We also have to be a bit more conservative just to understand the full Covid impact on business clients.

In the last month or two we have seen some green shoots. There has been a bit of an uptick in demand for credit, and hopefully that is a sign for the future. But we remain cautious, given the potential of a third wave or a fourth wave, and the end of May’s vaccine rollouts, and how effective the vaccine rollout will be.

So, while there are some positive signs, we remain cautious.

NOMPU SIZIBA: I don’t suppose you ask when your clients withdraw money – but you do indicate having seen a decline in deposits. To what extent do you think this was influenced by perhaps businesses having to withdraw money to tide themselves over during a period when they were not receiving any revenue?

MICHAEL SASSOON: There was quite a small drop in deposits – about 3%. It was really one or two depositors who may be invested in the markets, rather than anything which I think suggests that businesses were drawing down on their money and all other deposits. It’s more like high-net-worth individuals, who invest in markets versus being invested in cash, and that might have an impact on the deposits more than businesses relying on their own cash at this point.

NOMPU SIZIBA: So, but for the wealth business, do  you think that the numbers would have been far worse?

MICHAEL SASSOON: They would be worse – the wealth business of the group’s growth in earnings. But in the banking business income did drop about a percent or so across the group. That’s not too concerning. Given the drop in loans, we may have expected there to be more, but we have enhanced our margins somewhat and are growing some of our non-interest revenue lines – in particular in our digital business-banking area. The costs were well controlled, and that’s something. Where we had a drop in cost, our cost-to-income ratio improved.

So I think that the real question will be what happens to the credit environment in the future? Had we had a through-the-cycle credit-loss ratio, the banking performance would have been pretty good.

NOMPU SIZIBA: You talk about investment in digital. To what extent did you see that area increase in activity, obviously given the Covid situation?

MICHAEL SASSOON: Our digital banking income grew by about 14%, which we were quite happy with, even though some of the income in that is dependent on interest rates, and interest rates have come down. That has caused a little bit of lower income. Had it not been for that, income would have been even higher. And fortunately the big investment in digital we’ve made over the last couple of years enabled us to remove to remote-working capability pretty seamlessly, and be able to onboard services and engage with our clients throughout this period without there being any disruption at all, really.

NOMPU SIZIBA: I see that you’ve got an asset-finance business. You refer to your specialised equipment-finance business, which now accounts for 22% of your total asset-finance book. That’s up from 19% in the year prior. What does that segment cover?

MICHAEL SASSOON: There are various elements. We do some yellow-metal mining-related equipment. We also finance software, not equipment per se, but assets. We are growing some capabilities into the solar sector. So our traditional or historical business is very much office automation and kind of your more traditional ICT equipment. We are now moving into a slightly wider asset range that we finance.

NOMPU SIZIBA: Tell us about BYOND business banking. You do talk about having improved your operating loss there to R15 million. Just tell us about that business and how it’s different from the basic business.

MICHAEL SASSOON: This is our digital business-banking area, in which we’ve invested quite a bit. Off the back of our digital-banking platform clients can obtain banking, foreign exchange and credit. You can onboard yourself as a small business or medium business, yourself, and some ancillary services like payroll accounting integrated into Xero. So it’s quite a comprehensive integrated business-banking model which we’ve been investing in for some time. Those losses that you refer to are very much part of the investment that we make into the business, because we don’t capitalise that investment. And with the reduction in the losses to some degree now that we integrate our foreign exchange in there, we are seeing some synergies, given some of that growth in the digital banking revenue. But we are at the early stages of this journey to some degree.

Last year you may recall we obtained a loan guarantee from the ECB, European Central Bank, courtesy of the Dutch Development Bank FMO, which we are busy rolling out to smaller businesses that we would normally finance. We are building some capabilities, some automation in credit-score carding, to ensure that we can get to those clients and approve credit appropriately. That we think will further enhance our digital business-banking offering, which is so important for this country to really try and enable these small businesses to access financial services – which we know has been such a struggle in the past.

NOMPU SIZIBA: But how do you strike the balance? On the one hand it’s a great service to be able to extend financial assistance and more to SMEs, but we’re also in a very tricky time where the future is uncertain, and you also have to take care of shareholders and all the rest of it. So how do you get that balance right in terms of the risk mitigation and obviously fuelling SMEs that can help to grow the economy?

MICHAEL SASSOON: If there was an easy answer it would be great for the country, be great for business lenders. I think that a greater use of data and various data points to understand the credit risk beyond just the quarter historically of a bank, looking at management accounts or financial statements. I think there are other data points which can be understood better in granting credit. Historically we’ve always been very well secured by stock or debtors or equipment, and for these smaller businesses you might not be able to rely on that same level of security if they haven’t built up any meaningful assets. So understanding the individuals, understanding the various data points, I think will be important. And if we do that well I think there will be an opportunity to extend credit to segments of the economy which have struggled to obtain credit. And this is very much the concept of Naseera.

The FMO and the European Central Bank understand this challenge, and that’s why they’ve provided this loan guarantee, which means that we are able to kind of grow a little bit faster than we would have done without it, and understand and learn some of the credit elements of this market, while protecting shareholder value because of the nature of the guarantee.

But for it to be a sustainable long-term business for ourselves and for our clients, we need to make sure that we can recover the credit that we grant by and large.

NOMPU SIZIBA: Yes. Look, this is separate from anything to do with Sasfin, but you must have a view, given your experience. Why do you think the credit-guarantee scheme that was offered by the government through the banks just hasn’t worked? Why is it that only R18 billion of the R200 billion that’s been made available has been tapped by SMEs?

MICHAEL SASSOON: That’s a very good question. … the large banks, to their credit, did give a lot of payment relief and a lot of support, restructured loans, at the height of Covid and the lockdown. The experience I think was that there wasn’t significant demand. That being said, why wasn’t there such a large demand?

My sense is that if you were a business client of a bank, and you were a good credit risk, the bank would have lent you money in its ordinary course. If you were a very bad credit risk, I think that a bank would have been irresponsible to lend taxpayer money if it didn’t believe that it was recoverable. And therefore it actually only really catered towards the smallish segment of the business sector.

We also have participated in terms of the government’s loan-guarantee scheme, and to a small degree we’ve almost lent out our allocations, as it stands. But I think that in part there were many SMEs who aren’t really in the banking system, or don’t have credits on the banking system, who maybe could have benefited from the loan-guarantee scheme – which didn’t really apply because they weren’t already entrenched inside a banking system.

NOMPU SIZIBA: That was Michael Sassoon. He’s the CEO at Sasfin.

Loans Bad Credit Online – Sasfin profit drops on increased y/y credit impairment provisions

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You Thought Payday Lenders Were Bad? Welcome to Internet Lending.

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by James A. Bacon

A new law that went into effect this year is designed to protect Virginians against “predatory” short-term loans by limiting what lenders can charge. And in honor of National Consumer Protection Week, Attorney General Mark R. Herring is encouraging Virginians to familiarize themselves with the risks associated with smaller-dollar loans.

I’m all in favor of educating consumers, and I’m glad to see that the AG’s office is vigilant against fraudulent lending. But I can’t escape the worry that the political class’s do-gooder instinct to “help” poor people by regulating one of the few industry sectors willing to lend them money may do them more harm than good. Regulating payday lenders pushes poor people into the arms of online lenders.

In a press release today, the AG’s Office reported some interesting numbers regarding the scope of payday lending. Citing data from the 2019 Annual Report of the Bureau of Financial Institutions, the press release notes that 83,107 Virginians took out 268,097 payday loans totaling nearly $110 million with an average annual percentage rate of 253%.

That sounds terrible. Poor people trapped in a cycle of indebtedness and poverty, and all that. If there is fraudulent misrepresentation involved in the short-term loans, the AG’s Office needs to crack down. Nobody wants liars and cheats in the marketplace. But the more germane question is whether regulating the terms and conditions of the loans really helps poor people.

In 2019 the average loan amount made by Payday lenders was $413 with annualized interest rates ranging from e4% to 818%. Herring’s press release urges consumers to consider alternatives to “predatory” loans such as borrowing from banks and credit unions. Good luck with that! Banks aren’t interested in small-denomination loans, which are expensive to originate and process. Besides, how many poor people seeking payday loans even have banking relationships? Wells Fargo requires a minimum opening deposit of only $25 to open a checking account — but then charges a $10-a-month service fee!

Payday loans are predatory but checking accounts are not?

Consumers can avoid the monthly fees if they maintain a minimum $500 daily balance. Great. If poor people have $500 in their bank accounts, they wouldn’t need that $413 payday loan, would they?

The AG’s office also suggests taking out a credit card cash advance. Yeah, right, as if poor people are too stupid to figure that out themselves. I’ll guarantee you that the overwhelming percentage of payday borrowers either don’t have credit cards or have maxed them out.

Here’s the problem with lending money to poor people: they often default, and lenders don’t get their money back. When lenders advance loans to categories of people who don’t pay them back, they have to charger higher interest rates to offset the risk. Otherwise, if they lose enough money, they go out of business. This is a fundamental precept of finance — a reality that only politicians could be oblivious to.

The Bureau of Financial Institutions provides some useful data. While payday lenders in Virginia advanced $111 million in loans 2019, they also charged off $6.5 million as uncollectible. So, right off the bat, payday lenders had to charge about 6% more on an annualized basis just to offset the risk of nonpayment.

Then there’s the issue of administrative overhead. A $400 loan costs as much to process as a $4,000 loan. Offices must be maintained, rent paid, employees paid, and lawyers paid? Lawyers? Yes, payday lenders in Virginia sought to recover nearly $2 million worth of loans to 2,752 borrowers through lawsuits.

If payday lending were a lucrative business, one would expect to see more lenders entering the marketplace to get a piece of the action. But that’s not what happened in Virginia. According to the Bureau of Financial Institutions, between 2016 and 2019:

  • The number of payday lenders licensed to operate in Virginia fell from 18 to 15.
  • The number of locations operated declined from 171 to 152.
  • The total dollar amount of loans made tumbled from $326 million to $268 million.
  • The number of borrowers fell from 102,000 to 83,000.

The payday lending industry shrank. And it will continue to shrink. The new law caps interest and fees that can be charged under a short-term loan to an annual rate of 36% plus a maintenance fee, and sets the duration of loans to a minimum of four months. Fees and charges cannot exceed 50% of the original loan amount for loans less than $1,500.

Those caps will be severely constricting. According to the Bureau, the average payday term was 44 days. Interest rates ranged from 34% to 818%.

Where do poor people go when they are desperate for cash, they don’t have banking relationships, their credit cards are maxed out, and their friends and family don’t want to lend them the money because they don’t think they’ll get it back? They go online. There you see search results like these:

$400 – $5,000 Online Loans — No Credit History Needed

Fast Loans for Bad Credit — Got Bad Credit? No Problem.

Instant Approval / Bad Credit OK – No Credit Check Loans

Sound trustworthy to you? No, I didn’t think so.

An estimated 16% of Americans — almost one in six — have poor credit scores (below 580). For all practical purposes, these people have no access to conventional sources of credit like banks and credit cards. As the payday sector withers away, their only recourse is the wild, wild west of online lending.

Not surprisingly, Herring and his team have been focusing in recent years on online lenders, which, according to the press release, account for a growing share of the small-loan market. If you thought traditional payday lenders were bad, it turns out that online lenders are really sketchy. The AG’s Predatory Lending Unit has recovered more than $45.9 million in restitution and forgiven debt from online lenders. I doubt that’s what the authors of the payday loan legislation had in mind, but I expect Virginia will see a lot more of it.

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