What Consumers Should Know About High-Cost Loans

What Consumers Should Know About High-Cost Loans
Written by Publishing Team

Written by Marla Williams and David Tarpley
Legal Aid Association

Legal Aid AssociationNashville, Tennessee It’s an expensive time of year for many of us. Between gifts, trees, decorations, food, and other expenses, the costs of the holiday season can push budgets to their limits.

For some Tennessee residents, it may seem that the only option to cover this financial shortfall is to take out an emergency cash loan. But the drawbacks of these loans often far outweigh the benefits, costing borrowers much more than expected and trapping them in an endless cycle of debt. That’s because the costs associated with these loans are often so prohibitive that it would be impossible for an ordinary person to repay them. Some would say this is by design.

Here in Tennessee, the most prevalent types of high-cost consumer loans in Tennessee are:

  • loans for property, ratified in 1995, which allows customers to take out a small loan using their car as collateral. Once the loan is paid off, the borrower takes back his car, but if he can’t repay the loan principal and the high interest level, he may lose his car.
  • loan payday, ratified in 1997, which gives customers a short-term cash advance in exchange for writing a post-dated check to a creditor for the full amount of principal and interest owed by them—which can also be excessive. If the amount is not repaid, the creditor may take the borrower to court, which could result in liens on his property and even withholding of wages. Although the law places limits on the numbers and dollar amounts of payday loans a person can receive at one time, lenders often ignore these limits.
  • flexible loans, ratified in 2010, which provides customers with an open credit line, generally up to $4,000. Approved borrowers can withdraw any amount up to the maximum at any time – sometimes even more. As with other forms of high-cost loans, the APR is several times higher than that of traditional lenders – which incentivizes many customers to borrow additional money to pay off the original loan.

In recent years, flexible loans have overtaken other types of high-cost loans that were popular, in part due to the constant advertising push. If you are used to watching the early morning news, you will see many advertisements from creditors offering flexible loans. They are generally presented in the same way – how easy they are to get, how they save you from life’s problems.

What they don’t tell you in those commercials is how much these loans cost, and how aggressive lenders can be in going after borrowers who fail to repay their loans.

Under Tennessee law, the state legislature sets interest rate limits and other fees that are assessed on most consumer loans. The main exception to this are credit cards issued by banks. For most consumer loans, interest is only one of the fees allowed and is not usually the biggest cost.

For example, for flexible loans, the interest rate can be 24% per annum, and the so-called “customary fee” can be as high as 255% per annum, with a total annual rate of 279%. What matters, in the end, is the cost of the loan when all interest and other fees are included. The cost of the loan will vary somewhat depending on the type of loan, the amount borrowed and the length of the loan term, but all of these loans are too expensive for the borrower to pay back.

If a borrower fails to repay their loan, lenders often go to great lengths to get their money back. We had a client who wasn’t able to access his monthly Social Security benefits in the morning that was deposited into his bank account because payday lenders had already shown up on the post-dated cash checks he wrote.

If borrowers owe money to a high-cost lender that they cannot repay, their options are unfortunately very limited. But they must understand that by continuing to renew their existing loan, they are making the situation worse.

We cannot morally advise people not to pay legal debts. However, we can advise them about the consequences of making this choice. Lenders often threaten legal action if the loan is not repaid – often leaving it unclear to borrowers whether the penalties they might face are criminal or civil. A common threat borrowers hear is “If you don’t pay, we’ll get an injunction.”

It is important for borrowers to know that if the lender threatens with an injunction, they are referring to a civil warrant—the start of a civil lawsuit in court. Failure to pay a civil debt may have legal consequences, but it will not lead to criminal charges.

Additionally, in the case of flexible loans, the borrower must immediately stop the lender from accruing the usual fees, thus reducing the amount the borrower eventually has to repay.

At Legal Aid Society, we are not financial advisors. We do not advise people how to get out of debt. However, for those who are facing legal action from high-cost lenders, we may be able to help and, in some cases, mitigate what they are facing.

For those facing legal action, we often advocate for those cases when we discover legal issues that might be used to dismiss the case or reduce the liability of the client. We can help exempt property from being seized to pay a judgment or help set up a court-protected payment plan to pay the judgment while avoiding foreclosure. In some worst case scenarios, we may be able to help with bankruptcy.

Please call us at 800,238.1443 or visit for additional information on how we can help.

about the book

Marla K. Williams is the management attorney for the Legal Aid Association’s Cookeville office and is also the lead attorney for consumer practice.

David Tarpley is an attorney in the Nashville office and has practiced extensively in the field of consumer law.

About the Legal Aid Association

The Legal Aid Society of Middle Tennessee and the Cumberlands champions justice and fairness under the law. The nonprofit law firm offers civil legal representation and free education programs to help people in its area obtain justice, protect their well-being, and support opportunities to overcome poverty.

Serves 48 counties with offices in Clarksville, Columbia, Cookeville, Gallatin, Murfreesboro, Nashville, Oak Ridge, and Tullahoma.

The Legal Aid Society is funded in part by the United Way. Learn more at www.las.orgAnd Or by following the company on Facebook.

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