A recent article caught my attention highlighting the dangers of long-term and high-interest loans. In New York State, the legal limit for interest rates before considered usury is 16%. However, there are loopholes that allow some lenders to charge what is seemingly an unethical rate of interest. Sub-prime loans typically carry a higher interest rate (although not to the level of usury), as do payday loans and title loans.
For those unfamiliar, payday loans are high-interest loans issued to individuals to provide quick cash for expenses while you are waiting for your next paycheck. In addition to repaying the loan at a high interest rate, payday loans are dangerous because if they are not paid at the end of the term, they are renewed or extended creating more fees at this high rate of interest leading to a greater amount due. Title loans also provide a quick infusion of cash to a borrower in return for the title to your vehicle. Once paid off, the title is returned to you. Considering the high interest rates and fees, many borrowers will lose their vehicles over these types of loans. Fortunately for New Yorkers, both of these types of loans are illegal in the State of New York. Unfortunately, that doesn’t always stop individuals and companies from offering them to New Yorkers in a financial hardship.
The article addressed Nissan Motor Acceptance Company offering incentives to dealers to offer longer term loans on vehicles. While it’s no secret that automobile manufacturers prefer customers using their financing arms and that lenders make money by charging interest, this didn’t sit well here as a firm that works with those struggling with debt.
Loans of a longer duration typically offer a lower payment. This often tricks borrowers who fall for the promise of a lower payment while ultimately paying more over that term due to interest accruing. For example, if I put $3,000 down on a $28,000 vehicle and finance the remaining $25,000 at 3% interest the monthly payment and total payments would look like this:
While the difference between a six-year loan and an eight-year loan are not that pronounced in this example, it’s important to note that the lengthier loans are typically sought by those with poor credit and those in a difficult financial situation. They tend to aggressively seek the lowest payment possible without factoring in the long-term cost. If you have a credit score below 620, that rate could exceed 12%. Now suppose we take the same example above and now use an interest rate of 10% – the difference is much more significant. With poor credit, it can cost you over $11,000 just to borrow $25,000.
In reality, this type of loan is going to target low-income borrowers and those with poor credit. It will also disproportionately affect minorities, as numerous studies have shown they are often offered higher interest rates regardless of qualifications. Dealers will be pressured to offer these products to boost dealer compensation and salesperson commissions. Prior to this offer, dealers earned a flat fee of $150; now they could earn 1% of the total loan, up to $450. This will be problematic for anyone looking to trade in a vehicle that was financed over eight or nine years as the vehicle will not have much value, if any, until the loan is paid off. If you wanted to trade in such a vehicle to obtain a new(er) one, you may need to roll in the balance of the loan rather than get a credit for the trade in, resulting in even more debt.
Nissan is going to spin this story to say that this allows people to obtain a vehicle at a lower monthly payment or suggest that other companies do the same thing. That may be true, but does that make it right? At Zimmelman Law, we know all the tricks and traps that lead to more debt and have helped thousands of New Yorkers get out of debt.
Zimmelman Law PLLC
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