Many companies in the alternative lending industry are curious as to what their fate will be in the coming year of 2016, as state legislators are looking to impose new regulations on exactly who can get loans and what types of loans are available.
The battle between traditional and alternative lending
Typical lending uses your credit history to establish whether or not you are creditworthy, often posing quite the challenge for many individuals who have grown up in lackluster financial situations or whose educated has not been enough that they were properly taught how to manage their personal finances. In many ways, traditional lending punishes potential buyers by using their past as leverage against them. This has often been cited as something that reinforces the separation of classes in the United States and reduces class mobility.
The alternative lending industry, lenders that give out title loans in Texas and things like payday loans are often painted as vicious enemies when compared to the traditional establishment. But why should these lenders be seen this way? Unlike the typical lending industry, these types of lenders do not use your credit score to determine your creditworthiness. Instead, these lenders use the value of a particular asset to determine whether or not you qualify for a loan. You can get an asset on a watch, a home, or anything else, but, typically, these loans are on cars or boats. Cars and boats are traditionally the highest value items of average citizens.
New laws in the state of Texas
The Texas Fair Lending Alliance says the following about the predatory nature of title loans.
- They claim that title loan companies evade traditional usury laws by registering as Credit Access Businesses. This allows businesses to charge over 500% interest on some particular loans.
- They say that title loan companies contribute to something know as the “cycle of debt,” something that makes it difficult for individuals to ever escape the fate of what they originally owe.
- Payday loan borrowers often spend 199 days in debt for a two week payday loan. This is due to the fact that the interest on these loans is so high and that when payments are made, they rarely go to the principal, but instead, to just paying down the interest that’s owed.
- Credit card users who take out payday loans are 92% more likely to fall behind on their credit card payments.
Title loan companies argue that regulations that prevent people from getting title loans limit the freedom of choice of borrowers, but in truth, the Texas Fair Lending Alliance is trying to protect borrowers from themselves.
What’s your take? Do you believe title loans are helpful? Or harmful? Should these lending companies be shut down or allowed to blossom in our modern economy?