When people are short on money to pay their bills, they often turn to payday loans. In many states, however, individuals are limited in their ability to access payday loans via state regulations. Enter the world of online tribal payday loans.
Where other payday loans are inaccessible, tribal payday loans may be a workable solution. For most people, however, tribal payday loans are just as bad of a financial decision as a standard payday loan.
What Are Tribal Payday Loans?
According to the US Consumer Financial Protection Bureau (CFPB), payday loans are typically short-term loans for quantities of money less than $1000. These loans nearly always have very high-interest rates, meaning that borrowers face a complicated repayment process. Likewise, payday loans are known for their unsavory lending practices, which often break state and federal laws.
The CFPB does not have a definition for tribal payday loans specifically and the term has no specific legal meaning. Still, other sources state that tribal payday loans are payday loans that are offered through companies that claim to be located on tribal land rather than the land of any specific state.
Because the companies offering the loans are on tribal land rather than state-owned land, they are only subject to tribal loan regulations and federal loan regulations rather than state regulations and federal regulations.
As tribal regulations and federal regulations on payday loans are typically weaker than those of specific states, especially states which have robust consumer protections, tribal payday loans are typically more dangerous for borrowers.
Given how dangerous normal payday loans are for the borrower, tribal payday loans are substantially riskier. Tribal payday loans may also have higher interest rates than normal payday loans because they are not subject to limits set by state legislatures.
Borrowers of tribal payday loans may have a harder time discharging the loan in bankruptcy, refinancing the loan, and asserting their rights when lenders request payment.
The Potential Benefits Of Tribal Payday Loans
The potential benefits of tribal payday loans are not significantly different from the benefits of normal payday loans. In other words, the benefits of tribal payday loans are that they enable the borrower to borrow a small amount of money for a small amount of time, even when they don’t have good credit or reliable income.
Using the funds from a tribal payday loan, borrowers can cover their expenses when they are in between paychecks. Then, when the borrower gets their paycheck, they can start to repay the tribal payday loan.
Unlike other short-term loan options or credit lines like credit cards, payday loans are issued to people who may not have the means to repay the loan. This means that borrowers who are unemployed, already in debt, or otherwise financially disadvantaged can still access tribal payday loans.
Furthermore, the quantity of money disbursed by a tribal payday loan may be larger than a typical payday loan. As a result, borrowers can address more of their financial concerns with one loan, making it an appealing option for some purposes.
A Tribal Payday Loan Example
A comparison between a tribal payday loan, a regular payday loan, and another form of credit will illustrate the differences and benefits more clearly.
If Michael needs $2000 to cover urgent repairs for his car, but he has only $1000 a month in income, he will face a few issues when he tries to open a new credit card to cover the payment. Because the car repairs require one large payment of $2000, a new credit card with a credit limit of half the spending power will not be helpful.
Even if his credit is good, he won’t be able to open up a new line of credit, which covers the cost of the car repairs, as his income is too low. Furthermore, if Michael does manage to open up a new credit card with the required limit, he’ll need to wait to be approved, which can take up to a week. Likewise, if Michael doesn’t have an internet connection, it’ll be very hard to access a new credit card.
Then, he’ll need to wait for his credit card to come in the mail, which could take another week. When Michael needs the money for repairs today, a new credit card leaves him waiting, assuming he can get it at all.
On the other hand, if Michael tries to get a standard payday loan, he may have some success. While he will likely need to register his income and creditworthiness, his income is likely not a significant barrier to his accessing a loan.
Unfortunately, depending on where Michael is trying to borrow the funds with a payday loan, state regulations may prohibit the disbursal of the money that he needs. Alternatively, it may require his lender to collect collateral for the loan.
Thus, while Michael could potentially get the $2000 he needs, he might need to put some of his valuables up for collateral with a traditional payday loan. This means that he will need to visit the payday loan office in person, which may be difficult or expensive if his vehicle isn’t working.
If Michael can access a tribal payday loan, however, he will probably be able to get the $2000 he needs. While Michael will need to visit a website that offers the loan rather than a retail location, he won’t need to put up any collateral.
Furthermore, Michael probably won’t need to verify his income or his creditworthiness before getting his loan. As a result, Michael will be able to pay for his car payments on the day that he is approved for the loan, restoring his mobility immediately. In this example, a tribal payday loan was the only type of credit line that Michael could access given his needs and his situation.
The Dangers of Tribal Payday Loans
Unfortunately, tribal payday loans share all of the pitfalls and dangers of standard payday loans.
As with most payday loans, tribal payday loans are frequently offered by disreputable lenders who use false advertising, fraudulent billing practices, and other shady techniques to take advantage of borrowers, according to the US Federal Trade Commission.
Many payday loan operators lie to borrowers regarding the terms of repayment, the interest rate, and other critical details about the financing. Others are truthful about the characteristics of the loan but represent the information in a deceptive way, which can imply to borrowers that the loan is easier to repay than it is in actuality.
Because payday loans are typically targeted at people who are having financial difficulties, few potential borrowers have the resources needed to go over the terms of service in a payday loan to identify illegal or unethical clauses.
Aside from the dangers stemming from breaches of trade regulations, even when executed in accordance with the law, payday loans put the borrower at risk for:
- Incurring late payment fees
- Losing loan collateral due to inability to repay
- Damage to credit scores
- APRs in excess of 100% of the loan’s value
- Having a bank account locked due to activity by the lender
- Becoming trapped in a cycle of poverty
This means that getting a tribal payday loan to cover expenses is probably not a good financial decision for most people.
Whereas non-tribal payday loans must abide by the lending rules proposed by state legislatures, tribal payday loans do not need to. In other words, if a state has limited the interest rate on a payday loan to be no more than 25% on a yearly basis, a tribal payday loan could saddle borrowers with rates up to 500% or more.
Then, when the consumer attempts to repay the loan, they could suffer from additional fees, hounding by debt collectors, and other difficult consequences. Upon trying to disengage from the loans, borrowers of tribal payday loans may find that their means for legal recourse are both more limited and more difficult to access than they expected.
Confusion over specifics can lead to a lack of recourse as well. For example, many lawyers with debt expertise are only well-versed in their state’s borrowing rules, and the tribal payday loan laws may be unfamiliar to them. Likewise, consumer finance advocates, financial advisors, and other financial consultants may not understand how the terms of a tribal payday loan compare to a normal payday loan.
Avoiding Tribal Payday Loans
In the majority of cases, taking out a tribal payday loan is worse than taking out a traditional payday loan because borrowers have fewer protections.
Remember: the reduced level of oversight directed at tribal payday loans allows them to have more aggressive loan disbursements, but the costs are hidden in the terms for borrowers.
When in doubt, avoid taking a payday loan of any type if it can be avoided. If it’s impossible to avoid taking out a payday loan, read the terms carefully, and understand what your protections are under state laws.
Aim to take out the smallest possible payday loan and have a repayment strategy in place beforehand.