Home > Mortgages > A World Without Subprime Loans?

Comments 1 Comment

[UPDATE: Some offers mentioned below have expired and/or are no longer available on our site. You can view the current offers from our partners in our credit card marketplace. DISCLOSURE: Cards from our partners are mentioned below.]

Norman Googel thought he had done a pretty good job running payday lenders out of his state. As an assistant attorney general in West Virginia, Googel used the state’s usury law to close down payday lender storefronts, which had been using the charters of out-of-state banks to skirt state law.

“We cracked down on that approach,” Googel says. “After that we thought, ‘Well, now we’re done with payday lenders.’”

But in 2005, Googel received his first complaints about online payday loans. Internet loans quickly proved even more insidious than loans from brick-and-mortar stores. Their high fees sometimes amounted to interest rates as high as 780%, Googel says.

[Consumer Resource: Join the Debt Diet Challenge with Jean Chatzky & Credit.com]

And because online payday loans are tied directly to the borrower’s bank account, consumers often find themselves in a hole they can never escape.

“Pretty soon people can’t pay their mortgage, their car payments. They can’t buy groceries,” Googel says. “Some people are just completely ruined. It’s much harder to stop online payday lending.”

The dangers of subprime loans are well-documented. In past articles, Credit.com has explored problems with payday loans, prepaid debit cards, subprime mortgages, high-fee credit cards and bank overdraft fees.

Nevertheless, subprime loans only exist because they accommodate a market demand, one that is unlikely to disappear. What, then, would happen if suddenly subprime loans were banned altogether?

The short answer: Many bad things.

[Article: Kardashian Kredit Kard Kanceled]

“If people need a loan, they’re going to get it,” says Steven Schlein, spokesman for the Community Financial Services Association, the trade association for payday lenders. “They might get it from an illegal web site. Some may go to the mob. Or maybe they go to a local bar where they hear they can get an illegal, short-term loan.”

Many consumer advocates agree. Simply outlawing certain types of loans doesn’t necessarily leave consumers better off.

“Let’s say I get paid on Tuesday, but my rent is due Monday,” says Rachel Schneider, innovation director at the Center for Financial Services Innovation. “Banning payday loans doesn’t solve the very real problem of cash flow mismatch for low-income people.”

What would a world without subprime loans look like? To understand that, we need to look first at the many different kinds of subprime loans, and the ways in which they often hurt consumers who need them most. Next would be an examination of some real-life examples of what can happen when financial tools like payday loans are banned. Finally, we would try to imagine a world where subprime loans still exist, but are made more affordable and more useful for the average consumer through a combination of public regulation and private competition.

A Subprime Primer »

Image © Tara GoldenDreamstime.com

Pages: 1 2 3 4 5

Comments on articles and responses to those comments are not provided or commissioned by a bank advertiser. Responses have not been reviewed, approved or otherwise endorsed by a bank advertiser. It is not a bank advertiser's responsibility to ensure all posts and/or questions are answered.

Please note that our comments are moderated, so it may take a little time before you see them on the page. Thanks for your patience.

Certain credit cards and other financial products mentioned in this and other sponsored content on Credit.com are Partners with Credit.com. Credit.com receives compensation if our users apply for and ultimately sign up for any financial products or cards offered.

Hello, Reader!

Thanks for checking out Credit.com. We hope you find the site and the journalism we produce useful. We wanted to take some time to tell you a bit about ourselves.

Our People

The Credit.com editorial team is staffed by a team of editors and reporters, each with many years of financial reporting experience. We’ve worked for places like the New York Times, American Banker, Frontline, TheStreet.com, Business Insider, ABC News, NBC News, CNBC and many others. We also employ a few freelancers and more than 50 contributors (these are typically subject matter experts from the worlds of finance, academia, politics, business and elsewhere).

Our Reporting

We take great pains to ensure that the articles, video and graphics you see on Credit.com are thoroughly reported and fact-checked. Each story is read by two separate editors, and we adhere to the highest editorial standards. We’re not perfect, however, and if you see something that you think is wrong, please email us at editorial team [at] credit [dot] com,

The Credit.com editorial team is committed to providing our readers and viewers with sound, well-reported and understandable information designed to inform and empower. We won’t tell you what to do. We will, however, do our best to explain the consequences of various actions, thereby arming you with the information you need to make decisions that are in your best interests. We also write about things relating to money and finance we think are interesting and want to share.

In addition to appearing on Credit.com, our articles are syndicated to dozens of other news sites. We have more than 100 partners, including MSN, ABC News, CBS News, Yahoo, Marketwatch, Scripps, Money Magazine and many others. This network operates similarly to the Associated Press or Reuters, except we focus almost exclusively on issues relating to personal finance. These are not advertorial or paid placements, rather we provide these articles to our partners in most cases for free. These relationships create more awareness of Credit.com in general and they result in more traffic to us as well.

Our Business Model

Credit.com’s journalism is largely supported by an e-commerce business model. Rather than rely on revenue from display ad impressions, Credit.com maintains a financial marketplace separate from its editorial pages. When someone navigates to those pages, and applies for a credit card, for example, Credit.com will get paid what is essentially a finder’s fee if that person ends up getting the card. That doesn’t mean, however, that our editorial decisions are informed by the products available in our marketplace. The editorial team chooses what to write about and how to write about it independently of the decisions and priorities of the business side of the company. In fact, we maintain a strict and important firewall between the editorial and business departments. Our mission as journalists is to serve the reader, not the advertiser. In that sense, we are no different from any other news organization that is supported by ad revenue.

Visitors to Credit.com are also able to register for a free Credit.com account, which gives them access to a tool called The Credit Report Card. This tool provides users with two free credit scores and a breakdown of the information in their Experian credit report, updated twice monthly. Again, this tool is entirely free, and we mention that frequently in our articles, because we think that it’s a good thing for users to have access to data like this. Separate from its educational value, there is also a business angle to the Credit Report Card. Registered users can be matched with products and services for which they are most likely to qualify. In other words, if you register and you find that your credit is less than stellar, Credit.com won’t recommend a high-end platinum credit card that requires an excellent credit score You’d likely get rejected, and that’s no good for you or Credit.com. You’d be no closer to getting a product you need, there’d be a wasted inquiry on your credit report, and Credit.com wouldn’t get paid. These are essentially what are commonly referred to as "targeted ads" in the world of the Internet. Despite all of this, however, even if you never apply for any product, the Credit Report Card will remain free, and none of this will impact how the editorial team reports on credit and credit scores.

Your Stories

Lastly, much of what we do is informed by our own experiences as well as the experiences of our readers. We want to tell your stories if you’re interested in sharing them. Please email us at story ideas [at] credit [dot] com with ideas or visit us on Facebook or Twitter.

Thanks for stopping by.

- The Credit.com Editorial Team