The payday loan industry is notorious for its predatory practices and tendency to disregard the law. Federal and state governments alike have attempted to rein in payday lenders to protect consumers, especially since most payday loan borrowers ended up regretting their payday loans. Lawmakers had some success, limiting interest rates to reasonable levels in many states, but tribal payday loans take regulatory avoidance to a whole new level.
What is a tribal payday loan?
Payday loans are short-term, high-interest loans that you usually repay via direct debit to your bank account on your next payday (hence the name). They’re usually not reported to the credit bureaus and therefore have more relaxed qualification requirements than traditional loans.
Tribal payday loans are largely the same in practice. The only concrete difference between the two is the lender’s identity (at least on paper). Tribal payday loans are held by payday lenders who claim to operate out of Native American reservations, though they’re almost always entirely online.
That difference might seem harmless at first glance, but it makes tribal payday loans considerably more dangerous than even traditional payday loans.
Tribal lenders argue that they fall outside the jurisdiction of both state and federal laws, which is just a way to avoid respecting the protections in place for consumers. Without those restrictions, there’s no limit to the tactics that tribal lenders can implement.
The Consumer Financial Protection Bureau (CFPB) has sued tribal lenders over lending practices. This includes failure to disclose interest rates. And in 2022,
the U.S. District Court for the Eastern District of Virginia approved a nearly $500 million class action settlement resolving alleging that online tribal lending companies charged excessive interest rates.
Are tribal payday loans illegal?
When tribal payday loans first gained prominence, lenders operated under the premise that “tribal sovereign immunity” protected them from any lawsuits. That term refers to the fact that Native Americans have special legal privileges (it’s hard to sue them) and can largely govern themselves.
That excuse worked to an extent initially, and many online lenders profited from practices that disregarded the law. But in recent years, the government has begun to crack down on these practices:
- The Supreme Court ruled that online lenders must do more to prove that they fall under tribal immunity than simply filling out some forms, which has increased the standard of proof to qualify for tribal immunity.
- The Consumer Federal Protection Bureau (CFPB) has brought lawsuits to bear against lenders who supposedly qualify for tribal immunity, and courts dismissed arguments that their immunity justified illegal behavior, weakening the power of the exemption further.
So while tribal payday loans aren’t technically illegal, many of their token practices are.
To clarify: It is entirely within the bounds of the law to lend money while based on tribal land, but that doesn’t necessarily grant you tribal immunity or allow you to disregard federal or state law.
Did you take out a tribal loan?
DebtHammer may be able to help.
7 key things you need to know about tribal loans
If you need an emergency loan, here are some key facts you need to know.
1. Tribal lenders say they’re exempt from state and federal laws
It’s no secret that payday lenders charge incredibly high fees. But many state legislatures have started cracking down, passing statutes that regulate loan totals and cap interest and fees. In fact, payday loans are now illegal in many states. Tribal lenders argue that these fees don’t apply to them because of their sovereign immunity. Before you complete an application, it’s important that you research the lender and check your state laws.
2. You will pay a sky-high interest rate
Because of disagreements about regulation, tribal loans can be more expensive than payday loans. The CFPB says it’s common for payday lenders to charge a $15 fee for a $100 loan. That works out to the equivalent of an almost 400% interest rate for a two-week loan. Payday lenders often charge a fee of $15 for a $100 loan. But tribal lenders will charge more. But costs for tribal loans average annual percentage rates, or APRs, between 440% and 950% for their installment loans.
3. Tribal loans are actually installment loans
This means you’ll end up repaying them over months or years, instead of weeks like with a payday loan. Many lenders openly state in the terms and conditions that their loans are expensive forms of credit that aren’t suitable for long-term needs.
4. The loan amounts are usually small
Though some lenders will issue loans up to about $3,000, many cap the loans at about $1,000, or will only loan a small amount to first-time borrowers, who can then borrow more after they’ve successfully repaid the first loan. Some offer “loyalty programs” for repeat customers.
5. Your lender may not be licensed
Many tribal lenders bypass state licensing regulations. You may see a licensing certificate issued by a particular tribe, but that will have no bearing on your loan if you run into a problem or start questioning the legality of your loan.
6. You will almost always apply online
You don’t need to be a member of a tribal nation to apply. Most tribal lenders accept applications online — regardless of whether you belong to the tribe.
7. You have better options
It may seem like these loans are your only option. That’s no longer the case. Cash advance apps and peer-to-peer lending platforms will usually consider borrowers with bad credit. Even Reddit offers a subreddit called r/borrow where fellow Redditors will consider lending you money.
READ MORE: Loans for borrowers with bad credit
Can a tribal payday loan company sue you?
Yes, in theory, a tribal payday loan company can sue you. However, this is typically very rare because there is speculation that suing in state court could jeopardize their sovereign immunity. But they can only sue you if you’ve violated your initial loan agreement and are in default.
Remember tribal lenders can only take you to civil court — not a criminal court — if it even gets to that point. You will not go to jail if you don’t repay your tribal payday loan.
The majority of lenders prefer to negotiate personally. Many will help you create a payment plan rather than settle it in court.
Can tribal lenders garnish your wages?
If you haven’t put it together yet, most (if not all) tribal lenders are supposed to follow the same rules as any other payday lender.
They may decide to risk bending or breaking the rules, but it doesn’t mean that they could have their less-than-legal practices upheld in a court of law or supported by any American governing body.
So, like every other payday lender, tribal lenders can garnish your wages, but only if all of the following take place:
- You enter into a valid loan transaction with a lender
- You fail to repay the loan balance as you agreed
- The lender sues you and takes you to court
- A judge rules against you in your hearing
If any of the above criteria have not been met, then a tribal lender has no right to garnish your wages.
That said, if they do meet all of the above criteria, they can and will seize as much of your paycheck as they can to get their money.
Even still, they can’t take all of your wages and leave you with nothing. They can only take a portion of your disposable income up to the lesser of the following:
- 25% of your disposable income, if your disposable income is greater than $290
- Any amount greater than thirty times the federal minimum wage
For example, if your disposable income were $1,000 a week, a lender would be able to garnish $217.50 each week. 25% of $1,000 is $250, but the minimum wage in 2020 is $7.25, and $7.25 times 30 equals $217.50.
READ MORE: Is my payday lender licensed in my state?
Should you ever take out a tribal payday loan?
It’s pretty universally agreed that traditional payday loans should be avoided whenever possible. They’re outrageously expensive, and many of the lenders who offer them are willing to bend the rules to make an extra buck.
As bad as most payday loans are, tribal payday loans are often even worse. The simple fact that they’re owned by lenders who have gone out of their way to place themselves outside of the law demonstrates that they probably shouldn’t be trusted.
For all those reasons, we would never recommend that you ever take out any payday loan, tribal or otherwise, but we understand why some people do.
READ MORE: Payday loan requirements
Advantages of tribal payday loans
Tribal payday loans attract a similar borrower base as traditional payday loans, and for many of the same reasons. They offer a short-term way to make ends meet for individuals who have little to no other financial recourse.
Perhaps you have a low credit score and can’t qualify for a traditional loan. Or perhaps you simply don’t want to take out a large amount of debt because you just need a few hundred dollars to afford your groceries for the month.
In those scenarios, payday loans seem like a perfect solution.
Tribal payday loans can appeal to an even wider section of the consumer population because they don’t always adhere to federal or state laws. As a result, they can often offer more money than traditional payday loans, with some reaching up to as much as $2,000.
Disadvantages of tribal payday loans
As we’ve established, tribal payday loans also bring with them the many downsides of traditional payday loans – and then some.
They’re just as, if not more, expensive than their traditional counterparts, with Annual Percentage Rates (APRs) well into three digits.
To put that number into perspective, a standard credit card comes with an APR somewhere between 3% and 36%.
What’s even worse than their exorbitant prices (which at least you know about ahead of time) is that tribal payday lenders are more likely to practice deceitful or predatory lending tactics than those who are beholden to federal and state law.
Without any need to respect any of the government’s rules or regulations, they’re free to (and often do) surprise borrowers with hidden fees and use any underhanded tactics they like to collect on their loans.
By every measure, payday loans are dangerous, and tribal payday loans are even less safe than the rest of them.
Tribal payday loans are NOT a long term solution
In theory, tribal payday loans are designed to be a short-term solution to short-term problems. If you’re having difficulty making it to your next payday, lenders propose that you use a tribal payday loan to make ends meet.
On every tribal lending site, you’ll see a disclaimer that says something akin to the following: “This is an expensive form of borrowing and is not intended to be a long-term financial solution.”
Below you’ll see it under the important disclosures section of Plain Green, LLC. They’re a tribal payday lending company supposedly owned by “Chippewa Cree Tribe of the Rocky Boy’s Indian Reservation, Montana, a sovereign nation located within the United States of America.”
And yet Plain Green, LLC offers repayment terms between ten and twenty-six months, depending on your loan balance. That inherent contradiction is the perfect demonstration of the danger of tribal payday loans.
Whatever you do, don’t let yourself get sucked into a long-term, high-interest payday loan. Interest always compounds with time, and the results will be disastrous.
What do I do if I get caught in the tribal payday loan trap?
The tribal payday loan trap has historically proven even more difficult to get out of than the traditional one. However, the FTC and CFPB have begun to eliminate tribal lenders’ ability to skirt federal and state regulations.
Nowadays, most of the strategies that are effective at escaping the traditional payday loan cycle would work for getting out of the tribal payday loan trap as well.
For example, here are some great alternatives:
- Negotiate with your lenders: All payday lenders care about is collecting as much as possible. If you can offer them a deal that they think will be the most they can reasonably get out of you, they’ll often take it.
- Refinance with a personal loan: If you can qualify for a personal loan with a traditional lender and use it to consolidate and pay off all your payday loans, do so. They’re much cheaper and less likely to be predatory.
- Payday alternative loans (PALs): PALs are exactly what they sound like. Credit unions put forth these short-term loans to provide all of the benefits of payday loans without any of the drawbacks.
- Cash advance apps: These apps, also sometimes known as payday advance apps, provide almost instant cash, giving the user access to money they’ve already earned but haven’t yet received from their upcoming paycheck. Many are free, though some charge a small membership fee or other monthly fee. Most request a “tip” for service.
READ MORE: 10 Best Cash Advance Apps for Instant Money
The bottom line
If you’re struggling to find your way out of the tribal payday loan trap by yourself, consider getting expert help. DebtHammer specializes in helping borrowers like yourself escape both the traditional and the tribal payday loan traps. Contact us today for a free consultation, and we’ll get you started right away.
In general, no. A tribal lender will not report timely payments to the credit bureaus, so timely payments won’t help you credit score.
A lender issuing tribal loans generally won’t check your credit report, so your credit score doesn’t matter.
Though most websites say you’re limited to one loan at a time, it’s always possible to find a separate lender to issue you a separate loan. In fact, some people have taken out a new loan to pay off the original loan. We do not recommend this. If you’re in a situation where you’re considering this, please seek advice from a nonprofit credit counselor. Many offer free consultations.