Western Sky Financial was a lending company that charged exorbitant fees and interest rates on loans, and ceased operations in 2013. Although the company is no longer making loans, the story of Western Sky's loan operation is one that shows just how dangerous high-interest lending, like "payday loans," can be.
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Western Sky's "loan products"
Unlike most high-interest lenders, such as payday and title lenders (more on them later), Western Sky was based inside the borders of the Cheyenne River Indian Reservation and was not subject to U.S. laws governing high-interest loans. So, they were free to use unusual loan terms -- at least for a while.
Whereas most high-interest lending is done for short time periods -- such as 31 days or less -- Western Sky's loans came with terms ranging from 12 months to seven years. Interest rates depended on the specific loan terms, but the typical interest rate on a Western Sky loan was 135%.
As if that wasn't enough, while there were no up-front fees per se, there was a fee associated with each loan that was simply added onto the loan's balance. And, these fees could be large. For example, if you wanted to borrow $500, you had to take out an $850 loan, of which you received $500 and Western Sky pocketed the rest.
To illustrate just how ludicrous Western Sky's loan terms were, here are the particulars from an actual chart from Western Sky's "rates" page, while the website was still up:
|Loan Amount||Amount Borrower Receives||Loan Fee||APR||Number of Payments||Payment Amount|
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According to this chart, someone who borrowed $1,000 would end up paying back more than $4,000. And, someone who took out a $10,000 loan would end up paying back more than $62,000.
Fortunately, because of an enormous amount of consumer complaints and pressure by several activist groups, Western Sky ceased making new loans in September 2013. At the time, the company's loans had already been banned in 21 states, and several others were working on doing the same.
So, this type of lending doesn't exist anymore, right?
Well, it does, but in a different form. As I briefly mentioned earlier, two major forms of high-interest lending -- payday and title loans, are still alive and well in many states.
High-cost payday loans are allowed in 32 states, with specific terms set by each individual state concerning the timeframe and maximum interest rates allowed. For example, California allows for paydays loans of up to $300, but capped them at a 31-day term and a maximum APR of 459% (believe it or not, there were higher payday loans before many states' laws went into effect).
Title loans are less common, but are potentially even more dangerous. Allowed in just 17 states (and another four states where "loopholes" exist), title lending has much higher maximum loan amounts, and in many states there are no limits whatsoever -- even on the interest rate. For example, New Hampshire allows for title loans of up to $10,000 with an initial one-month term with up to 10 renewals, at 25% interest per month (300% per year).
Avoid at all costs
High-interest loans may be outlawed entirely at some point, but in the meantime, they should be avoided at all costs. Just to put some numbers into the above discussion, a New Hampshire borrower who took out the maximum $10,000 title loan would have to pay back $12,500 (plus fees) after just one month. And, this is in a state that caps loan amounts and interest rates! Many people take out payday loans every month, paying thousands of dollars for the privilege of borrowing just a few hundred.
Simply put, pretty much any other way of coming up with the money you need -- credit cards, borrowing from friends and family, etc. -- is a better idea than using high-interest lenders. As a final thought, consider that many of Western Sky's borrowers are still making exorbitant loan payments, according to Consumer Affairs, nearly two years after the company ceased lending. And many of these individuals actually still owe more than they originally borrowed.
Don't get trapped in this vicious cycle. Avoid high-interest loans at all costs.
The article Western Sky Loans Are No More, but We Can All Learn a Valuable Lesson originally appeared on Fool.com.
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