These 4 Utah Banks Are 'Exporting Predatory Lending' Across America

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  • Most -- but not all -- U.S. states cap lending rates to protect consumers. "Rent-a-bank" loans let lenders avoid these rules.
  • Some lenders are charging APYs of as much as 200% on consumer loans.
  • Always shop around before taking a personal loan and read documents before you sign.

A legal loophole lets lenders avoid state rate caps and charge APRs as high as 200%.

Financially, it's been a tough year for many Americans. People have had to grapple with the double whammy of skyrocketing prices and unprecedented interest rate hikes. Not only have U.S. debt levels increased in recent months, some predatory lenders are also profiting from people's financial struggles. As a result, USA Today is putting the spotlight on several banks that enable nationwide lending with super high rates.

Most -- but not all -- states cap the annual percentage rates (APRs) that lenders can charge. But certain fintech companies get around these rules by partnering with banks in states like Utah that do not cap rates on loans. USA Today said the following Utah banks are enabling the practice:

  • Capital Community Bank of Provo
  • FinWise Bank of Murray
  • First Electronic Bank of Salt Lake City
  • Transportation Alliance Bank, or TAB Bank, of Ogden

How lenders can charge APRs as high as 200% nationwide

In much of the country, state laws cap loan APRs. According to research from the National Consumer Law Center released earlier this year, the median rate cap for a $500 loan in 46 states is 39.5%.

The issue is that a handful of states, including Utah, do not cap APRs. By partnering with other financial companies around the country, those Utah-based banks are able to circumvent state regulations. Lauren Saunders, associate director of the National Consumer Law Center, told USA Today that they're "exporting predatory lending all over the country."

Dubbed "rent-a-bank" loans, consumer protection organizations argue companies are making loans that would otherwise be illegal. Borrowers might have to pay APRs of 100% or 200%, even in states with rate caps. The issue was highlighted in February when a group of consumer advocates wrote to the FDIC asking it to put a stop to these rent-a-bank schemes.

Some of the companies mentioned in the USA Today article defended themselves, arguing that they are better than payday lenders, some of whom charge even higher rates. Critics say these are predatory lenders who target people who need cash quickly, particularly those with low credit scores who might not qualify for a traditional loan.

How to avoid predatory lenders

The hallmarks of predatory loans are unfair, unclear, or abusive terms such as high rates, high fees, or excessively short repayment terms. If you're having trouble qualifying for a loan or need money quickly, predatory lenders may try to take advantage of your situation. Unfortunately, these loans often come with so many strings attached that they quickly trap you in a cycle of debt.

Here are some ways to avoid unscrupulous lenders.

1. Shop around

If you're considering a personal loan, shop around to find the best lender for your circumstances. Compare the APRs, loan terms, fees, and total cost of your loan. Read all the documents and ask lots of questions. It's important you understand exactly what you'll be paying each month, and how your loan works.

If you're unsure of the details, ask a friend or financial advisor to check your documents. There are several organizations that offer free financial advice, so you might be able to get an expert to check your paperwork.

2. Look for warning signs

Watch out for these red flags when you're comparing lenders:

  • Three-digit APRs: Be aware that many states cap APRs at less than 40% on small- to mid-sized consumer loans. Let's say you take out a $500 loan with a six-month term and an APY of 200%. You may wind up paying an extra $300 in interest by the time you pay it off.
  • Aggressive sales tactics: If you feel like the lender is being overly pushy or trying to rush you to sign before you're ready, tread carefully. It may be they don't want you to go away and compare prices or fully understand what you're signing.
  • Blank spaces in a document: When you read the paperwork, watch out for empty spaces. Predatory lenders might fill those spaces afterward with unfavorable terms you didn't agree to.
  • Excessive fees: Ask what fees you'll have to pay, such as application fees, an origination fee, or a fee for paying your loan off early. Most lenders will charge some fees, such as late charges. But it isn't a good sign if there are a lot of fees, particularly if they're higher than other lenders.
  • No credit check: You can get a personal loan with no credit score, but it won't be easy and the interest rate will likely be much higher than other loans.

3. Look for alternatives

You may feel like going into debt is the only option, but there may be ways you can either cut your spending or bring in some extra cash. Look over your budget and see if there's anywhere you can shave a few dollars off your spending.

Right now the job market is relatively strong, so there may be a way you can find some extra work or even take on a side hustle. Perhaps you have unwanted items you could sell to see you through a short-term crisis. Another option is to speak to local authorities and nonprofit organizations to find out if you qualify for assistance. You might even ask a family member for help.

If there's any way you can avoid borrowing money at unfavorable terms, it will save you more pain further down the road. Might you be able to wait until you've had a chance to save up and pay in cash?

Bottom line

If you're already struggling to make ends meet, taking on debt, particularly high interest debt, can make life even harder. If you can't keep up with the payments, your credit score could take a hit which would make any further borrowing more complicated. Moreover, you may have to pay late fees and could face legal action.

Most importantly, don't assume that your interest rate will be capped just because you live in a state with protections. The rent-a-bank loophole means predatory lenders can operate throughout the country. Read everything and know exactly what APR you'll pay before you sign.

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