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It’s getting so a bank can’t make a decent buck these days.

The New York district attorney’s office recently subpoenaed Capital One Financial Corp. for its subprime auto lending practices. The bank joins Santander Consumer USA Holdings and Ally Financial (formerly General Motors Acceptance Corp.), institutions that are likewise under investigation by other law enforcement and regulatory agencies.

This particular vehicle-financing product is marketed to consumers with less than stellar credit—hence the use of the term subprime—for their typically used-car purchases. It’s not an easy business to run, given the effort that’s required to sort through a history of credit problems on the front end and collect payments that have a greater propensity to run late on the back.

Performed correctly, though, the rewards for lenders are high, and that explains why subprime lending boomed in the years leading up to the collapse and is heating up yet again today. That and a seemingly benign credit environment, where delinquencies are low and loan charge-offs are slight.

The longer these Goldilocks conditions (not too hot, not too cold) endure, the more tempting it is for ambitious lenders and investors to rationalize away their own troubled pasts. And the longer that funding is available to lenders at rock-bottom rates, the greater the temptation to overcharge borrowers who may not be knowledgeable enough to recognize predatory practices even when they’re victimized by them.

So it’s no surprise that subprime lending is attracting negative attention, although it’s hard to understand why lenders are willing to risk the penalties. Perhaps it has something to do with the typical industry practice of paying bonuses within the years in which the profits are booked, and hardly ever clawing it back when the fines and legal bills that are sure to follow have to be paid.

Payday Loan Practices Under the Microscope

To that end, Fifth Third Bank just announced that it was cutting its upfront fee for payday loans to 3% from 10% and extending repayment terms to 45 days from 30. The bank’s move is in response to harsh public criticism and keen regulatory scrutiny of a product that burdens already cash-strapped consumers with debts that often carry triple-digit interest rates. (You can see how much more expensive the lifetime cost of debt is for someone with bad credit using this calculator.)

Although the reduced fee will help to make these loans less costly for borrowers, increasing the term by just 15 days does little to prevent repeated use of a product that was designed to encourage quite the opposite. Still, hard-pressed consumers will continue to beat a path to their payday lender’s door because there are, unfortunately, no good alternatives for those with limited means and even more limited credit.

When You Have Bad Credit

If you find yourself in the same tough spot (you can check your credit scores for free on Credit.com to see where you stand), there are a few things worth keeping in mind.

Start by comparing annual percentage rates, a calculation that combines interest and upfront fees into a single metric that’s more easily shopped. There are free online calculators that will help you with the math.

Also compare contractual terms and conditions. Pay particular attention to the “events of default” section, which defines the triggers (nonpayment, bankruptcy), the consequences you face when that occurs (higher interest rates, fees) and what you can do to “cure” the matter within a specified time. This language will vary from lender to lender, so it’s important to factor the differences into your decision making process.

Finally, whether you’re considering a four-year auto loan or a 45-day account advance (as some banks call payday loans), be sure to have a plan for paying it off as soon as you can afford to do so. These loans are expensive, and the longer they remain on the books, the less flexibility you’ll have to develop a more economical way of dealing with a budgetary crisis: an emergency cash stash.

This story is an Op/Ed contribution to Credit.com and does not necessarily represent the views of the company or its affiliates.

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