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When Lenders Sue, Quick Cash Can Turn Into a Lifetime of Debt

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On February 5, 2022

When Lenders Sue, Quick Cash Can Turn Into a Lifetime of Debt

High-cost lenders exploit laws tipped in their favor to sue tens of thousands of Americans every year. The result: A $1,000 loan grows to $40,000.

Series: Debt Inc.

Five years ago, Naya Burks of St. Louis borrowed $1,000 from AmeriCash Loans. The money came at a steep price: She had to pay back $1,737 over six months.

“I really needed the cash, and that was the only thing that I could think of doing at the time,” she said. The decision has hung over her life ever since.

A single mother who works unpredictable hours at a chiropractor’s office, she made payments for a couple of months, then she defaulted.

So AmeriCash sued her, payday loans in Ironton a step that high-cost lenders – makers of payday, auto-title and installment loans – take against their customers tens of thousands of times each year. In just Missouri and Oklahoma, which have court databases that allow statewide searches, such lenders file more than 29,000 suits annually, according to a ProPublica analysis.

ProPublica’s examination shows that the court system is often tipped in lenders’ favor, making lawsuits profitable for them while often dramatically increasing the cost of loans for borrowers.

High-cost loans already come with annual interest rates ranging from about 30 percent to 400 percent or more. In some states, if a suit results in a judgment – the typical outcome – the debt can then continue to accrue at a high interest rate. In Missouri, there are no limits on such rates.

Many states also allow lenders to charge borrowers for the cost of suing them, adding legal fees on top of the principal and interest they owe. One major lender routinely charges legal fees equal to one-third of the debt, even though it uses an in-house lawyer and such cases usually consist of filing routine paperwork. Borrowers, meanwhile, are rarely represented by an attorney.

After a judgment, lenders can garnish borrowers’ wages or bank accounts in most states. Only four states prohibit wage garnishment for most debts, according to the National Consumer Law Center; in 20, lenders can seize up to one-quarter of borrowers’ paychecks. Since the average borrower who takes out a high-cost loan is already stretched to the limit, with annual income typically below $30,000, losing such a large portion of their pay “starts the whole downward spiral,” said Laura Frossard of Legal Aid Services of Oklahoma.

Takeaways

  • How does a $1,000 loan turn into a $40,000 debt ? It’s what can happen when high-cost lenders use the courts to collect.
  • High-cost lenders frequently sue their customers . Since the beginning of 2009, high-cost lenders have filed more than 47,000 suits in Missouri and more than 95,000 suits in Oklahoma.
  • When high-cost lenders sue, some states allow them to pile on extra costs – like charging borrowers for the cost of suing them. One major lender routinely charges legal fees equal to one-third of the debt, even though it uses an in-house lawyer.
  • High-cost loans already come with steep interest rates. But in some states, small debts can continue to accrue interest even after a lawsuit is resolved. In Missouri, there are no limits on such rates – and that’s how a $1,000 loan turns into a $40,000 debt.

The peril is not just financial. In Missouri and other states, debtors who don’t appear in court also risk arrest.

As ProPublica has previously reported, the growth of high-cost lending has sparked battles across the country. In response to efforts to limit interest rates or otherwise prevent a cycle of debt, lenders have fought back with campaigns of their own and by transforming their products.

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