Even though the U.S. economy is getting better, the housing market has improved and the stock market is at all time highs, all that high level economic activity does very little for the average consumer. The truth is that many American households are still on a tight budget and many are on a desperate budget. The quality of many jobs are not that good, which translates to low income. The cost of utility bills, gas, food, rent, property taxes, education and medicine having been going down. All of this adds up to a bleak financial situation for many Americans.
One would guess that this would be a great time for large, institutional lenders like banks and credit unions to jump into this market. After all it only makes sense, at least on the surface. We have millions of Americans who are in need of extra money to meet their expenses and most of them are living in households with at least one income, often there are two incomes. The banks could issue personal loans (unsecured loans, sometimes called signature loans) to these consumers and in return make a nice profit.
Unfortunately for the many low income consumers out there this is not the current situation. Banks and credit unions have walked away and left behind the unsecured debt market. While they do still issue some credit cards and they might have some signature loans for their excellent (and long standing) customers, in general this product line is gone from their offerings.
The problem is that the financial situation for the bottom 50% of American workers is just not that good. Banks already went through a major meltdown back in 2008 and they are not interested in lending to financially struggling Americans. The banks have dozens of other more lucrative businesses to make money with, so it is not incorrect to say they have left behind unsecured lending. It's a completely different world from 2004 when banks were constantly trying to lend money to anyone and everyone who would sign on their loan contract.
Native American loans are still relevant because they are one of the last group of lenders that will provide loans to lower income consumers. The tribal lenders do not check any of the big three credit rating agencies for background information, surprisingly the Native American lenders simply do not care about a consumer's past credit mistakes.
The way Native American lenders operate is they want to gather as many Americans who have a job (be in full-time or part-time) and turn them into customers. From there it simply becomes a numbers game because once a tribal lender gets over 10,000 customers they know a certain percentage (the majority) will be responsible and repay their loans, or at a minimum will work hard to try to repay (keep up with) their debt.
A small percentage will fail to repay the loan and in those instances the tribal lender will still most likely take some money from that customer because many customers make at least one or two repayments before giving up. And for customers that do default on their debt the tribal lender will usually make a few cents on the dollar for those bad loans by eventually selling them to an aggressive collection agency. These collection firms will buy bad debt for pennies on the dollar and work hard to force (embarrass, cajole, plead with) the ex-customers to pay back the money that's owed.
Overall it is definitely a profitable enterprise, that's why so many tribes have jumped into the unsecured lending game. The fact that it's all done through web-based businesses and the telephone helps keep costs low. Plus, federally recognized tribal lenders do not have to pay federal, state or local taxes due to their sovereign status.
Even if a tribal lender only makes $300,000 in profit from their lending activities through the year they get to keep 100% of their profits. It is an exciting time for many tribes because even the most remote sovereign tribes can join in on this business by putting up a website and setting up some phone lines.
With banks no longer active in unsecured consumer loans and with at least half of all U.S. households in some degree of financial distress (past due bills, student debt, credit card debt) the stage is set for the continued use of tribal loans going forward for years.
Several states want these loans to go away because of the high interest and the high cost, but they will not be successful since the tribes have their sovereign nation status. Several consumer groups want the tribes to stop issuing loans due to the damage they do to lower income households.
Again, these groups will complain but it won't get them very far as the tribes are pretty much immune to all the online complaining that goes on. As long as there is demand for these loans the tribal companies will keep supplying them. And there looks to be no end in sight to financially troubled and desperate people in the United States.