The Checkout

Even the Small Loans Can Hurt

Nancy Trejos

When we think about abusive lending practices, we often think about credit cards and subprime mortgages. But folks, there are many types of loans you can get out there that can get you into trouble.

Recently, the Consumer Federation of America, the Consumers Union, and the National Consumer Law Center rated states on how well they protect consumers from excessive interest charges on four types of loans: auto title loans, which are short-term, usually lasting no more than 30 days; payday loans, which are small-dollar, short-term loans that borrowers promise to repay out of their next paycheck; six-month $500 unsecured installment loans; and one-year $1,000 unsecured installment loans.

States received a "Passing" grade if the loan's APR was 36 percent or less or if they banned payday or auto title loans. Here's how they did:

Eight states and the District of Columbia received passing grades of four on all four types of loans. Maryland was among the eight. Virginia was not.

Fourteen states failed on all four counts. None were in this area.

States scored the worst when it came to payday loans. In fact, 38 failed. Twenty-four states failed to guard against abusive six-month, $500 unsecured installment loans and 21 states failed when it came to expensive auto title loans.

Thirty-three states and the District did well with one-year $1,000 unsecured loans.

"The current subprime mortgage crisis shows how abusive lending practices harm not only individual consumers, but also the overall economy," said Elizabeth Renuart, an attorney with the National Consumer Law Center. "Now that the economy is so tight for cash-strapped consumers, it is more important than ever for states to provide reasonable protection against rate gouging by small lenders."

By Nancy Trejos |  September 9, 2008; 7:42 PM ET Economy Watch , Nancy Trejos
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