Have you tried to get a signature loan from your bank lately? Banks used to be in the business of lending money to people and that was before the great financial collapse of 2008.
When the whole financial system was in a cascading collapse in September of 2008 all sorts of things suddenly changed. The Congress, Federal Reserve, FDIC and the U.S. Treasury all worked together to provide a pile of cash to the largest banks in the United States. And it wasn't a small amount of money either, it wound-up being in the trillions.
Even though the loans were mostly repaid (or are in the process of being repaid) they still provided a huge cash infusion to the banks. Since the trillions of dollars in loans were awarded at a zero (or near zero) interest rate, it made it very simple for these large banks to make lots of money. All they had to do was accept these massive deposits and then earn the interest from standard deposits of this big pile of money.
There were some odd side effects that were not in the plan when this re-capitalization was undertaken. One of the ramifications of this program was to make the banks disinterested in lending money, especially when it comes to lending money to individual borrowers. Now they do still make money and are very active in issuing mortgages. And there are some car loans still being issued as well. These are asset secured loans. There is not much danger to the bank when they issue this type of loan.
The real problem is the unsecured loans, which are often referred to as personal loans or signature loans, is that there is no reason for banks to issue these any longer. At least, that's the way the banks view the situation. They are not interested in taking a loss. Banks are in the business now of accomplishing just one thing, which is making lots of money while taking as little risk as possible. This is the key formula.
The signature loan product just doesn't fit in their strategy now. Even though there is still a strong demand for signature loans it doesn't matter to the banking industry. They have essentially walked away from this line of business. There just is no reason for them to get into this business. They have much more secure, and often risk free ways to make money. So extending themselves for these more risky loans is just no longer in the equation.
This is a big part of the rise of the Native American lending industry over the last five years. Before the financial collapse there would be little reason to take out such a high interest loan but after the financial mess and the banks exit from the unsecured loans business. But with the banks out of the picture it sets the stage for tribal lenders to step into the void and start issuing the equivalent to the signature loan. The tribal loan firms started offering either their installment loan product or the more popular payday loan product.
There is a problem with this substitute for the signature loan. In fact there are more than a few problems. First, the amount you can borrow from a tribal lender versus a signature loan is much lower. While the signature loan could be for up to $10,000 the average tribal loan is for around $1,000. Not nearly enough for the modern era, and don't forget that the need for capital is much greater after the financial collapse than before it. For the available credit line to shrink by so much has not helped consumers at all.
Then here is a the problem of how long the loan will be outstanding. While the signature loan would often be written for a term of three years or five years, the average tribal loan is somewhere around 14 days for the payday version and for about one year for the tribal installment loan. Obviously, this is another (major) drop in quality when comparing the old bank signature loans to the modern tribal loans.
Here is yet another problem, which is the interest rates the tribal loan shops will charge versus the charges the bank signature loans would charge. The unsecured debt from a bank would often be anywhere from 7% to 15% depending on the bank and what year you happened to be borrowing from.
This compares to the drastically higher rates of the tribal loan firms which are around 60% APR on the low end and around 780% APR on the high end. All of the tribal lenders charge much, much more in interest than the bank-issued signature loans ever could have dreamed of charging. Since the banks are all licensed (usually through a federal charter and sometimes via the state) it means that the banks could not charge the outlandish interest fees that the tribal lenders can get away with.
The reason the tribes can charge whatever they choose has to do with their sovereign status. Since the tribal lands are technically considered fully independent (sometimes the term independent nation is used, other times they are said to be sovereign) they have the right to conduct their business in any fashion that they see fit. And often they see fit to charge very high rates.
With signature loans gone and no sign that they will be returning anytime soon it's time to consider going with whatever is left in the consumer lending world, which is often just the Native American lenders. Yes, there are a few other choices like loan stores (like Springleaf Financial) and there are some credit unions left, but the average American will not be able to qualify for unsecured loans from these financial organizations. Instead, the regular (simple and unsecured) lending is now going to be provided via tribal lenders.
That's good for anyone who is looking for an easy loan to qualify for and a loan that will be provided (sent) fast. But for anyone who is paying attention to the costs of the loan, well they are not going to be very thrilled with these replacements to the bank signature loan.
Recent Comments