Category Archives: Interest Rates

Why Credit Card Interest Rates Should Be Capped

By Ryan C. Wood

Credit card interest rates should be capped for the same reasons we have laws to make sure the food supply is safe and why we have seatbelts in our vehicles.  It is all about consumer protection.  It is just that simple and laws about our credit “products” are no different.  I recently noticed another bill was put before Congress to legislate at the federal level interest rate caps on creditor cards for consumers.  Maybe this time the law might actually get passed and signed.  I have written all kinds of articles about how we need credit and short-term loan reform in a number of areas. I am hopeful, but I doubt any real progress will be made in the near future to limit taking advantage of people that need short-term loans to pay for food or housing. Even as a bankruptcy attorney I have advocated for years to legislate protection regarding debts………

How Did We Get To 30 Percent Interest Rates To Begin With?

Each state has usury laws to protect consumers from unreasonable or unconscionable interest rates and contracts.  I have previously discussed “Why Are Credit Card Interest Rates So High” given there are state usury laws that are supposed protect consumers from unconscionable interest rates. Big business can easily find all kinds of ways to skirt existing legislation or change protections that protect individual consumers. I could list hundreds of examples and it is nothing new. It is unfortunate that over the years it has just become worse and worse to the tune of millions of dollars in disparity.  We just see higher and higher shameless interest rates.   

Why Are Credit Card Interest Rates So High?

Payday Loans and Title Loans

In a prior article I wrote: “Why Payday Loans and Title Loans Need More Regulation and Not Less.”  I used the term loan shark not less than twelve times.  It is just the truth and why and how can this continue?  In this particular article I mention how there are laws to make sure there is no price gouging in the event of a natural disasters given people are vulnerable at that time………  These laws are protections resulting from a natural disaster. For some reason we do not want to protect consumers when they have a personal disaster whether in their control or not . . . . .

Why Payday Loans and Title Loans Need More Regulation and Not Less

The lending and credit practices in place right now are absolutely loan sharking and should be illegal period.  In the meantime let us discuss how things have run amuck. 

I have also questioned and complained about “How Can 1,000 Percent Interest Be Legal?” Well it should not be period.

How Can 1,000 Percent Interest Be Legal?

Why Are Unconscionable Contract Laws Not Enforced

Arguably, or just my opinion, most payday loans, title loans and potentially credit card agreement terms are unconscionable contracts. In California we have Civil Code Section 1670.5 providing that if a part of a contract or contract is found to be unconscionable the court may refuse to enforce the provision of the contract or contract. Proving a contract is unconscionable is no easy task but generally the contract is overly harsh, unduly oppressive or unfairly one-sided. Unconscionable contracts are agreements that are unreasonably favorable to the credit card company or bank given they are clearly the more powerful party in the transaction.  Contracts or agreements that are overly harsh or unduly oppressive or are so one-sided as to shock the conscience should not be enforced.  Again, arguably 20-30% interest shocks the conscience.  Can we not agree that 1,000% interest is shocking? What is the limit?  In some industries there is no limit on mark-up of goods or services.  In our system the market is supposed to determine price of goods or services.  At the same time there are all kinds of examples of regulation that manipulate market conditions to the detriment of some parties and the benefit of others.  It is very difficult to agree on what is right or wrong, but can we all agree that we as consumers are supposed to have protections from parties we have no bargaining power with……….

Regulation For A Safe Food Supply

No one really complains about regulations that ensure our food supply is safe from production to sale.  We all actually take it for granted.  If we have more financial regulations to ensure the safe distribution of borrowed funds is it so different?  Nope.  They are just different industries and products.  We need better regulation to ensure safe borrowing for the benefit of consumers.  People are getting sick on bad meat (bad credit agreements) and it is not okay.

Capping Credit Card Interest Rates [AGAIN] Is A Great Start

I cannot say this about all laws that are changed, but generally how we treat many circumstances under the law have been developed over hundreds of years of trial and error. As a bankruptcy attorney there has been some form of debt relief by law, Bankruptcy Code, to obtain the discharge of personal liability of debts. We have modified the Bankruptcy Code over time but never entirely done away with it. Do you think debt and credit is something new? It is not. There is absolutely nothing new about one party as lender and another as the borrower. Why cannot we not learn from history so we are not doomed to repeat bad history? We more or less have done away with interest rate caps even though for hundreds of years under state usury law we capped interest rates to protect consumers. I ask you what has changed to warrant eliminating caps on interest rates? If there anything? Is there no more capitalism with a conscience possibly?

I see capping credit card interest rates like legislating that cars must have seatbelts or regulation to ensure safe food supply.  It is just that simple.    

How Can 1,000 Percent Interest Be Legal?

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Interest rates are capturing my attention more and more these days. One human being pays less than 3 percent interest to borrow money while another human being agrees to pay 1,000 percent interest. Loan sharking is perfectly legal again. Just look at payday loans, cash advances and the title loan lending industries. They are horribly expensive to borrow money from and I can tell you for a fact they will violate the Fair Debt Collections Practices Act when trying to collect for nonpayment. Our government is asleep at the wheel on this issue. Why are we allowing people to be charged unconscionably high interest rates to borrow money that were intended to be illegal? Society as a whole deemed charging such high interest rates bad for society and passed usury laws to limit how much interest can be charged. The theory is that those in financial stress need to be protected from themselves to a certain extent. They may not be thinking clearly given the stress they are under which makes them ripe to be taken advantage of. Unfortunately there are exceptions to exceptions in most states that allow this horrible interest rates.

What A 132 Percent Interest Loan Looks Like Other Than Just Horrible

The 132 percent interest loan was the result of a title loan. The borrower turns over to the lender their pink slip to their vehicle and the borrower is given a loan with the vehicle as collateral. This is a non-purchase money security interest loan for those keeping score out there that know what a PMSI loan is. If not, please Google “purchase money security interest” to find out why PMSI is a good thing for you and your finances, especially if you own real property (house or land) in California. Given the loan is secured by collateral you would think the loan is not a high risk loan and the interest rate would be reasonable. The 132 percent interest says otherwise though. So this 132 percent interest loan was for the principal balance of $18,000 and a term of three years or 36 months. The collateral was a vehicle worth good money still, a Toyota Sequoia. In addition to the 132 percent interest there was a prepaid finance charge to be paid upfront of $1,800. So this person actually only borrowed $16,200 since they had to pay $1,800 upfront. The kicker is they are paying interest on the full $18,000. Horrible.

The monthly loan payment is $2,046.19. What? That is a mortgage payment not a vehicle loan payment. Each year the borrower will pay $24,554.28 to the lender for the original borrowed $16,200. The total amount due on the loan if each payment were made during the three years is $73,662.84. I have no idea why the borrower needed $16,200 so bad they were willing to pay it back 4 times over and I did not ask. All I know is this loan should be illegal.

California Law And Title Loans

California is considered a loophole state. This borrower would end up paying back the original $16,200 borrowed 4 times over. This is criminal and illegal right? Wrong. There are limits or caps on interest for title loans in California for loans of $2,500 or less. So what do title loan lenders do in California? They only do title loans in amounts above $2,500 so that the California Usury Laws do not apply. Nice. So when the title loan company employee wants you to add $500 to your title loan to bring the amount borrowed over $2,500 it is to allow the title loan company to charge you a higher interest rate. They are not looking out for your best interest.

The 132 Percent Loan Is Not Much Different Than Carrying A Balance On A Credit Card

Almost every one of our clients expresses some sort of guilt at some point in the process of filing for bankruptcy protection. Most of the time there is absolutely no reason to feel guilty. There is actually no loss of money by those discharged in the bankruptcy case. How you can that be you ask? If someone is discharging $30,000 in debts then someone or a company out there lost money. Nope. Wrong. Not a true. Most of our clients have been making payments for years and years before there is a problem or seek bankruptcy protection to legally discharge their debts. All that interest accrues and gets paid. So the principal borrowed gets paid back and what is left to pay is the ongoing interest fees from carrying a balance on the card each month. For example let us say you purchased a TV at Costco, a 60’ Samsung for $2,500 on your Discover Card with an interest rate of 20%. To pay off the debt in 12 months you would have to make a minimum payment of $232 a month for 12 months, total payments of $2,784. The credit card company only gets $284 in profits. A more likely scenario is repayment will take three years or more. If the balance of $2,500 with 20% in paid off in 48 months or four years the monthly payment will be around $77 a month, total payments of $3,696. There is about $1,196 in interest profit to be made and the principal amount borrowed? It was paid off on month 32. So if this person retains a bankruptcy attorney and files for bankruptcy protection after 32 months or more of making payments Discover Card will only have lost gross profits from an interest rate that used to be illegal.

The Good News Is There Is Another Loophole To Help Title Loan Borrowers

This is kind of good news. That bad news is the loophole is in filing a Chapter 13 bankruptcy case. When reorganizing debts in Chapter 13 bankruptcy lawyers can have their clients only payback the fair market value of the vehicle collateral. Not what is owed according to the loan terms. So in the example above if the borrowers Toyota Sequoia is only worth $12,000 in the real world that is what the borrower will pay at around 4.75% interest. So not only can we reduce the principal amount owed, but we can reduce the percentage rate too. Filing Chapter 13 would allow the borrower in our example to pay back the loan and get the pink slip back at $210 a month for 60 months, the length of the Chapter 13 Plan. What a massive savings and the lender actually loses nothing. The lender just loses the gross profits resulting from what should be an illegal interest rate to begin with.