Stop the Debt Trap

For too long, predatory lenders have gotten away with trapping consumers in vicious cycles of debt.

Most commonly, this happens through high-cost loans such as payday, installment or auto title loans. Marketed as fast cash that can be applied for in minutes, but often carrying triple digit interest rates, these loans are debt traps, plain and simple.

To better protect consumers from these predatory practices, PIRG is working to pass bipartisan legislation called the Veterans and Consumers Fair Credit Act (VCFCA). The bill would extend existing protections from predatory interest rates that exist for active duty service members by capping annual rates at 36% APR for all consumers, including veterans.

The debt trap can take different forms depending on which type of high-cost loan someone takes out.

Payday loans, which use uncashed paychecks as collateral, are typically for “two weeks until payday.” High-cost installment loans are typically for larger amounts to be paid back over longer periods of time and are often less regulated than payday loans. Auto title loans are similar to installment loans but use automobiles as collateral.

Three different loans, all bad for consumers.

PAYDAY LOANS

Many people take out these high-cost loans to help make ends meet. But once someone has taken out a payday loan, the lender automatically withdraws payments from their bank account when due. The excessive interest rates of payday loans are so high that they often cut into other expenses, so many customers end up taking out another loan, and another loan after that, falling into a vicious cycle of perpetual debt.

INSTALLMENT LOANS

Installment loans don't require automatic bank account withdrawals like payday loans do, but many people struggle with paying back installment loans because of terms that lock them into owing two or three times the original loan amounts.

TITLE LOANS

With title loans, the same bad terms found in an installment loan could also lead to the repossession of a person’s car — possibly with their belongings still inside. For a borrower, losing their means of getting to work could lead to losing their job or the ability to land one, worsening their financial situation even more.

No matter the type of loan, high-cost lenders have created a business model which preys upon people in difficult financial situations. They advertise a quick fix, but sell financial products which are designed to trap the buyer in long-term debt.

That’s why PIRG is working to pass bipartisan legislation called the Veterans and Consumers Fair Credit Act (VCFCA). Sponsored by Representatives Jesus “Chuy” Garcia (D-IL-4) and Glenn Grothman (R-WI-6), the bill would extend existing protections from predatory lending for active duty service members under the Military Lending Act (MLA) to all consumers, including veterans.

The VCFCA would cap annual interest rates at 36% for payday, installment and title loans for all consumers.

High-cost lenders set up shop in high concentrations outside military bases like "bears on a trout stream" due to common vulnerabilities of service members, including their youth and their low but reliable incomes. To protect service members from predatory lending, the Military Lending Act was passed by Congress in 2006 and revised in 2015 by the Department of Defense to cap interest rates at 36% APR on high-cost loans sold to active duty servicemembers.

But servicemembers are not the only targets. High-cost lenders tend to be located in communities with higher proportions of racial and ethnic minority and low-income households, and the typical payday borrower is more likely to be a woman or a renter.

That’s why the 36% rate cap should be extended to all consumers as a base level of protection from triple digit debt traps. The VCFCA would also allow states to enact even more protective caps.

Support for rate caps crosses party lines

Placing rate caps on consumer loans is a policy that enjoys wide bipartisan public support. Polls show that around 70 percent of Americans support such caps — and in particular, voters in blue and red states alike have demonstrated overwhelming support for rate caps on payday loans.

"While I normally do not like the federal government regulating business, the fact that so many loans are provided online today leaves the federal government no choice but to act on this issue."

— Rep. Glenn Grothman (R-WI-6) testifies before the United States Senate Committee on Banking, Housing, and Urban Affairs

"[The Military Lending Act of 2006] worked, and it provided us with a robust model for regulating consumer loans. It’s time to extend those same protections to veterans, servicemembers’ families, and other consumers.”

— Rep. Jesús "Chuy" Garcia (D-IL-4) testifies before the United States Senate Committee on Banking, Housing, and Urban Affairs

Together we can stop the debt trap

PIRG has been a leading voice sounding the alarm on predatory loans for decades. We worked with the Consumer Financial Protection Bureau (CFPB) for five years on its payday lending rule and have helped pass state interest rate caps, most recently in Illinois.

We are currently working with the CFPB to fix its payday rule, which was gutted under the Trump administration. However, the best way to protect consumers from high-cost loans is through an interest rate cap that applies to payday, installment and title loans.

With growing bipartisan support nationwide, now is the time to pass rate caps that will protect all consumers. You can help us build momentum to stop the debt trap.

Predatory lenders promise quick cash, but trap consumers in a cycle of debt. It's time to stop the debt trap.

PAYDAY LOANS

INSTALLMENT LOANS

TITLE LOANS