High interest payday loans are seen by critics as a fast track to endless cycles of debt for borrowers. Are they a scam? Some would say yes, although they're legal. Certainly no one would dispute that they're dangerous. That's why many states have adopted regulations intended to limit the damage payday loans can inflict on people's personal finances.
But a new breed of payday loan has emerged that does an end run around state regulations -- or so lenders hope. These are loans made online by Indian tribes, which claim sovereign immunity from state and local rules. So-called tribal lenders say they have to adhere only to federal regulations, which tend to be far less strict than what states have imposed.
To discuss these loans further we talked with Tom Feltner, director of financial services at the Consumer Federation of America.
"Payday loans are very high-cost loans, sometimes exceeding triple-digit interest rates -- 300-400 percent. The payments are tied to the date of your next payday and they usually rely on abusive collection tactics such as holding a post-dated check or holding direct access to your bank account through electronic transfer," says Feltner.
Feltner says the vast majority of these types of loans are balloon-payment loans, meaning that the entire amount is due on the borrower's next payday and if he or she can't make that entire amount they have an additional interest fee -- creating a dangerous cycle.
So what is the difference between traditional, short-term payday loans and those offered online via Native American tribes? Feltner says there is almost no difference.
"They're still very high cost. They still have payments tied to your next payday, and they still rely on direct access to your bank account to enforce collection," says Feltner.
Many of the lenders claiming tribal-sovereign immunity aren't actually operated directly by a Native American tribe, but instead operated by members of the tribe or other lenders partnering with tribes. These lenders seek to evade prohibitions or strong consumer protections in states that currently limit payday loans, such as the costs or terms and conditions. These lenders claim that they are not subject to state law -- and instead are subject to tribal law, which has few restrictions on these types of loans -- and can make loans to anyone online in any state in the country.
Because these tribal loans are billed as "emergency cash infusions," oftentimes the lenders ask for a borrower's bank account number -- which can cause a big headache when they withdraw money directly from the account to make the interest payments. In some cases, the annual percentage rate for some of these loans can top 600 percent.
So what should consumers watch out for?
"Any time a lender offers the opportunity for quick cash and requires that you give up personal financial information, such as a Social Security number of bank account number, that should raise a red flag for consumers," says Feltner.