Payday lenders are back with “flex loans” in Arizona

Inside Subprime: April 12, 2018

By Lindsay Frankel

A new type of high-interest loan has entered the lending scene in Arizona. After payday loans with annual interest rates more than 36 percent became illegal in Arizona in 2010, former payday lenders had to get creative. Their solution? “Flex loans,” which use loopholes to get around interest rate caps. It seems predatory lending is alive and well, even in states that have passed laws to prohibit it.

Lenders in Arizona are able to circumvent interest rate caps by imposing various fees for processing transactions, sending billing statements, and even maintaining account information. And while these fees are capped at $150, recent analysis from Jean Ann Fox of the Consumer Federation of America has revealed that these combined costs add up to a triple-digit annual interest rate. Although voters chose to outlaw payday lending in 2008, a bill allowing flex loans passed in 2015, which effectively brought payday lending in Arizona back to life.

Worse than payday loans?

In some ways, these loans are even more harmful to consumers than payday loans. Unlike payday loans, flex loans act as an open line of credit, which can be an attractive option for borrowers with bad credit, who may not be able to get approved for a traditional credit card. They don’t need to be renewed, and borrowers stay in debt so long as they can continue making their minimum payments. This lures borrowers in Arizona into a cycle of debt that may be more difficult to overcome than the debt incurred from a payday loan.

Notably, flex loans were allowed just one year after lawmakers allowed for higher interest rates and doubled the fixed fee cap to $150, caving way for the new business model to be successful.

A report from the Southwest Center for Economic Integrity found that if an individual takes out a no credit check flex loan in Arizona for $500 and makes $25 monthly payments, it would take the borrower three years to pay off the loan, and the accumulated interest and fees would end up being more than $1,900 when all is said and done.

Bad credit can mean few options.

Industry lobbyist Jason Rose noted that flex loans fill a need for people with bad credit in Arizona who have no other options for borrowing money in an emergency. “Since banks won’t make unsecured loans to people with credit that suffered during the last downturn, is it possible there is a gap right now?” he asked, in an interview with the East Valley Tribune.

After voting in favor of the bill, Republican representative Steve Montenegro stated that lenders provide a service, and that democrats should not assume that Arizona residents with bad credit will make bad decisions when borrowing.

However, like payday loans, the short duration of flex loans can create the need for repeat loans that continue the cycle of debt. Opponents of the 2015 bill also argue that many payday lenders require direct access to the borrower’s bank account. “This isn’t a way to get back on your feet. This is economic slavery,” said Juan Mendez, a Democratic representative.

Borrowers should be aware that while payday loans in Arizona are illegal in the state, that doesn’t mean they’re safe from predatory lending. Sadly, legally available flex loans may also propel a harmful cycle of debt. Individuals with bad credit should explore all other options and familiarize themselves with the terms of a flex loan before agreeing to the customary fees.

To learn more about subprime lending in Arizona, check out these related pages and articles from OppLoans: