Should Loans with Poor Credit Requirements be More Regulated?
Increasing controversy surrounds the question of whether loans with poor credit should be more strictly regulated by the federal or state governments. Democrats passed the Dodd-Frank Act of 2010 to address the abuses of lenders that caused the mortgage crisis of 2008-2009. Supporters of greater regulation feel that many short-term and bad credit loans take advantage of poorer consumers, minorities and people with limited academic educations. However, many Republicans and business investors view all loans as products of the free enterprise system. This segment opposes increased financial regulations and feels that deregulating the financial markets is the best way to manage lending.
The Consumer Financial Protection Bureau, or CFPB, was created by Dodd-Frank to regulate the financial industry, but the bureau has become a divisive and controversial player in the war to regulate loan products. Autonews.com reported that 82 percent of the attendees at the 2017 American Financial Services Association’s auto finance conference felt that CFPB director Richard Cordray would not finish his term, which expires in July of 2018. President Trump opposes the CFPB and increased financial regulations. Despite the
diminished prospects of federal regulation caused by Trump and Republican opposition, many states are regulating loan products according to the CFPB’s guidelines.
However, opponents of regulation point out that the FTC already enforces many laws to protect consumers from predatory lending and illegal loan products. The FTC.gov has filed many enforcement actions against lenders for unfair advertising and billing practices, violations of the Electronic Fund Transfer Act and deceptive, unfair and abusive lending and debt-collection practices.
Why Getting Loans with Poor Credit Inspires Greater Regulatory Efforts
Unfortunately, people with bad credit often fail to use responsible borrowing practices, which can trap them in cycles of debt and lead to making unwise purchases. That’s why many people call for increased regulations of loan products. For example, if someone borrows $500 in a short-term, high-interest loan, the interest rates could run 300 percent to 400 percent. Even though the loan is only for two weeks, the interest rate and loan balance create an immediate debt that can be overwhelming. This loan must be repaid from the borrower’s next paycheck, which could reduce the money needed for everyday living expenses.
These borrowers are often less sophisticated in financial matters, and they might borrow $500 when they only need $300. The extra $200 tempts the borrower to spend the cash on frivolous or impulse items. When the loan comes due, the borrower can’t afford to pay normal living expenses, so he or she often takes out another high-interest loan That approach adds a new cycle of interest and debt, which is how people can become trapped.
The CFPB, Democrats and consumer groups feel that more financial regulations can prevent these kind of abuses and discourage predatory lending practices. Debt.org defines predatory lending as targeting minorities, young borrowers, elderly people and those with low incomes with abusive lending practices and poor credit loans with high interest rates that the borrowers can’t afford to repay.
Failure to disclose information about a loan, providing false information, charging usurious interest rates and fees and targeting unsophisticated borrowers are commonly considered predatory practices regardless of whether they’re legal. Imposing unfair or abusive repayment terms and coercing people into borrowing money they don’t need are considered unfair practices, and consumer-oriented groups call for stricter regulations to prevent these abuses.
Poor Credit Loans Generate Controversy
Poor credit loans, despite criticism and political opposition, fulfill a need for people who have low credit scores. In today’s digital environment, access to credit and debit cards has become almost mandatory. Getting online has become a status symbol for families, and children can actually fall behind at school if they don’t have Internet access. Good credit is an essential status symbol, and the higher your credit score, the easier it is to get low-interest loans. Unfortunately, people who look for poor credit loans don’t have as many options to get cash or obtain low-interest financing.
In return for the increased risk of defaulting on loans, poor credit lenders generally charge higher interest rates regardless of whether the loan is a short-term or installment loan. Although higher interest rates can cause some borrowers to get trapped in debt, many borrowers use these loans responsibly and repay their debts as promised.
The Best Borrowing Practices for Getting Poor Credit Loans Online
Getting poor credit loans online can be a lifesaver in certain circumstances, but these loans can also trap consumers in debt and generate high default rates, which damages the economy. A recent report posted at Amercianbar.org warns that subprime lending to people with credit scores under 650 has again become common. This was one of the practices that led to the mortgage crisis of 2008-2009. Peer-to-peer lending and other alternative loan products are also generating economic uncertainties.
Borrowers with bad credit, however, can protect themselves regardless of whether loans are more closely regulated. Borrowers should beware of predatory lending practices, unlicensed loan offers and loan churning, which is the practice of lending more money when borrowers can’t afford to repay their current obligations. There will always be predatory lending in one form or another, and consumers can only protect themselves by learning how to handle their finances and make wiser borrowing decisions.
Existing federal regulations protect consumers from many unethical and predatory practices including credit card abuses. The Credit Card Accountability, Responsibility and Disclosure, or CARD, Act requires creditors to show how long it takes to pay off credit card debt if borrowers only make minimum payments. Although interest rates for these cards are lower than payday-type and other short-term loans, the extended repayment periods can trap people just as effectively as easy-to-get short-term, high-interest loans according to a report at Bankrate.com.
Expanding Consumer Awareness of Lending Practices Remains the Best Borrowing Solution
Regardless of federal or state regulations, the best strategy for staying out of debt traps is learning about loans, researching lenders, understanding the terms of each type of credit and borrowing only what you can afford to repay. Poor credit loans online might make sense if they can save you from fees and penalties or provide a business or personal opportunity, but only if you can afford to repay the loan. According to Thecreditsolutionprogram.com, each borrower should always check on the following details before borrowing money online:
- What is the repayment period–two weeks or one-to-five years?
- Is the interest rate exorbitant based on the repayment period?
- What fees are included–such as origination fees, late payment fees, personal check fees and returned check fees?
- Will your payments be made as automatic withdrawals?
- Is any kind of collateral required?
Poor credit loans–and all forms of credit–always carry pros and cons. As a borrower, it is your responsibility to understand the terms of the loan, your ability to repay it and whether you really need a loan. It’s amazing how often people can get by without borrowing if they work to find creative financing solutions such as borrowing from friends and family, getting an advance at work, working longer hours or at a part-time job, cutting expenses or tapping into IRAs or 401(k)s for temporary loans.
Bad credit installment loans, short-term loans and other alternative lending products can provide a lifeline for people with poor credit. Increased regulations could force many lenders out of business–including those that charge reasonable fees based on the loan repayment period and the legitimate administrative costs. Find out more about the controversy over loans with poor credit at the Personal Money Store.