Friday, July 03, 2009
Editorial: Loan shark repellent
A fair product for short-term loans is needed.
From the RoundTable blog
Read the latest entries
A General Assembly panel began work this week to determine what, if anything, to do about car title lenders charging 300 percent interest to people who can least afford it.
The panel needn't labor long; the solution is easy: Ban these types of loans. Or at the very least require that they charge no more than the 36 percent interest limitation imposed on other types of lenders.
Currently, with triple-digit interest rates, a person can borrow $1,000 against her car, make $250 payments for six months and still owe $1,000, Jay Speer, executive director of the Virginia Poverty Law Center explained to the panel. At this rate, the debtor is imprisoned.
Car title and other open-ended loans are on the rise ever since Virginia imposed new regulations this year on payday loans. Payday lenders, now unable to lock people into spiraling debt at unconscionable interest rates, are abandoning that product in favor of ones that slip through the state's loopholes.
In Virginia, a lender can offer an open-ended or car title loan at whatever interest rate the company wants as long as the borrower has the first 25 days interest-free to repay the loan. Virginia is one of only nine states that fails to ban or regulate these loan sharks.
Those who defend such loans say that they make available to credit-risky, mostly lower income, borrowers the cash desperately needed for car repairs or health care.
Yet these loans do no one a favor. Instead, they trap people in a cycle of escalating debt and place them at risk of losing their cars and then their jobs.
What is needed is an alternative. Lawmakers should spend little time deciding what to do about car title and open-end lenders. They already know these products are harmful.
Resources instead should be directed to finding ways to encourage legitimate short-term loans to help people with emergencies without increasing their long-term hardship.
According to the Richmond Times-Dispatch, the state soon plans to set up an emergency loan program for government workers who need to borrow small sums of money.
Lawmakers should also look for ways to encourage banks and credit unions to do the same for everyone else.
