One of the main problems with the credit system is that people with bad scores receive less access to credit and higher interest rates. Both push them toward potentially predatory forms of lending, such as tribal loans.
Tribal interest rates are among the highest on the market, and they often trap people in a cycle of neverending debt. Here’s what you should know about them, including how they work, the problems with using them, and the best alternatives.
What Are Tribal Loans?
Tribal loans are a version of payday or installment debt offered by lenders who claim immunity from state lending regulations via ownership by or association with a Native American tribe.
Tribal loans are typically short-term, online loans with small to medium balances and carry interest rates above typical legal limits.
Because federally recognized tribes are sovereign nations, they can operate under tribal law without interference from state governments. Tribal lenders partner with these tribes and claim immunity by extension, which they use to get around legal protections for consumers.
⚠️Companies offering tribal loans always claim to be wholly owned by a Native American tribe. They have to make that claim to be immune to state law. Many of them are actually operated by outsiders who have nothing to do with the tribe and are simply using it as a front.
Tribal lenders often have to respect federal law. It’s the basis for their immunity. Unfortunately, federal regulations often do little to protect borrowers. State governments are generally responsible for limitations on interest rates, loan sizes, and repayment terms.
Like payday loans, tribal loans are accessible to just about anyone, even with bad credit. There are no credit checks during underwriting, and borrowers usually only need a little income to qualify. They’re also quick to close, as borrowers often get their proceeds within a single business day.
They pay a massive price for the privilege, though.
⚠️ Tribal interest rates regularly reach the high triple digits. Think somewhere between 300% and 800% APR. For reference, the legal limit is 36% in around a third of the United States.
Should You Ever Take Out a Tribal Loan?
With very few exceptions, taking out tribal loans is a painfully expensive mistake. Forgive me for getting on my soapbox, but the rent-a-tribe strategy might be the most despicable lending scheme in existence.
First, tribal lenders take advantage of Native American tribes that struggle financially. The lenders usually give them a small percentage (1% to 2%) of their lending operation’s proceeds for the use of the tribe’s sovereign immunity.
They then use that privilege to abuse consumers with poor credit whose backs are against the wall. Typically, they’re people who need a little cash to pay for something like a car accident or put food on the table.
Often because they can’t qualify for other forms of financing, these people resort to tribal loans and end up paying interest rates that nobody could keep up with, even over the short term.
When someone can’t repay these loans, they often pay for a rollover to push the deadline back, which traps them in an endless cycle of debt. That’s illegal in many states, but of course, tribal lenders don’t follow those regulations.
👉 For example: Eagle Valley Lending is a tribal lender that operates as an arm of the Tonto Apache Tribe, a federally recognized sovereign American Indian tribe. Their typical loan is for $300 with a 12-month repayment term and a 725% interest rate.
That means you’d pay a whopping $759.04 to borrow just $300, which is beyond unreasonable.
What Happens When You Don’t Pay Back Tribal Loans?
Because of their overwhelming costs, tribal loans tend to have a high default rate. Some users try and fail to keep up with their loan payments, while others see the ridiculous interest rate and give up, perhaps rationalizing their choice after learning the loan is illegal under state law.
When this happens, tribal lenders will make attempts to collect, just like a payday lender. They may do any or all of the following:
- Cash your post-dated check
- Debit your account directly (multiple times, if it fails)
- Threaten you with a lawsuit, arrest, or wage garnishment
- Harass you via constant phone calls or emails, even at odd hours
- Threaten or attempt to contact your family or employer to report your debt
They will always try to charge your account and take your money directly first. If that fails, they’ll attempt to scare you into paying by harassing or threatening you. While these tactics are understandably effective, most of their threats are probably empty.
If a tribal lender violates state regulations or operates without a license, it’s unlikely that they could ever get a ruling against you in a legitimate court.
They may try to convince you to obey the laws of their “tribal court,” but they can’t use that to enforce any wage garnishment against you, and they definitely can’t arrest you or send you to jail.
⚠️ Most tribal lenders do not report payment activity to the three credit bureaus, but defaulting on one may still hurt your credit. Lenders can sell your account to a debt collections agency, which may show up on your credit report.
Is Tribal Lending Illegal?
Unfortunately, tribal lending is something of a legal battleground. It’s true, Native American tribes do have sovereign immunity, but that doesn’t necessarily mean all tribal lenders can legally ignore state or federal laws.
In 2016, the Supreme Court of California held that some tribal lenders do not have a sufficient connection to their Native American tribe to warrant the use of their tribal immunity. It ruled that lenders must prove their connection to benefit from tribal immunity, as many only fill out some forms, which isn’t enough.
In addition, both the Federal Trade Commission and the Consumer Financial Protection Bureau have successfully sued tribal lenders for garnishing wages without the order of a legitimate court or otherwise collecting on loans that break state regulations.
Cases like these indicate the increasing likelihood that the government will eventually eliminate the tribal lender strategy as an effective way around the law.
Tribal Loans vs. Payday Loans vs. Personal Loans
Here’s how tribal loans compare to payday and personal loans.
|Tribal Loans||Payday Loans||Personal Loans|
|Interest Rate (APR)||400% to 800%||100% to 400%||6% to 36%|
|Loan Size||$500 to $2,500||$10 to $1,000||$500 to $100,000|
|Repayment Term||6 to 24 months||1 to 4 weeks||3 to 60 months|
*These are just a range for typical loan terms. Your results may vary.
As you can see, tribal loans are somewhere in between a payday loan and a personal installment loan. They typically claim to be a superior financing option for people who would otherwise use payday loans because their longer repayment terms give borrowers more time to come up with their payments.
However, because their interest rates are higher, borrowers frequently find them harder to afford than payday loans in reality. The longer loan term just gives more time for the interest to accumulate.
Of course, a personal loan is generally the best option of the three, but borrowers with bad credit will struggle to qualify for one.
Best Alternatives to Tribal Loans
Though tribal loans aren’t a viable solution, they bring up a real problem in America: People with bad credit need financing, too, often for emergency expenses. However, they don’t qualify for traditional debt.
Many predatory lenders use their captive customers’ needs to charge them as much interest as possible. However, there are options out there that are more affordable while still accessible to people with low credit scores.
A couple of examples include:
- Secured credit cards: These accounts are best for people with no credit history, but they work for those who have made mistakes too. Because you must put down a deposit equal to your credit limit, lenders are more comfortable financing risky borrowers this way. With timely payments, you can avoid interest costs entirely.
- Paycheck advance apps: If you have a stable income but need a few hundred dollars or so, these apps can give you an interest-free advance on your paycheck. They generally do not check credit and often cost nothing to use, though some charge a small monthly fee.
If you experience an unexpected financial emergency and find yourself without any savings to fall back on, these are better borrowing alternatives than tribal loans. Of course, they’re not going to support you forever, and no amount of debt is ever as affordable as a solid emergency fund.
📘Learn More: If you have bad credit, start building a better score as soon as possible. Not only will it benefit your short-term borrowing rates, but it’s a necessity for any long-term accounts, like a mortgage. Use these strategies to starting building credit today: How to Build Credit: 11 Most Effective Ways.
How to Get Out From Under Tribal Loans
While it’s always better to avoid taking out tribal loans in the first place, some people only learn that lesson after they’re already stuck with the debt.
If that’s true for you, look into lending laws in your state, the specific terms of your debt, and who monitors the tribal loans in your state. Everyone’s situation is different, and you’ll need a good understanding of these factors to navigate your path to debt freedom.
Next, it’s always best to consult with a lawyer who has experience with cases like yours. That’s the easiest way to get rid of tribal loans as safely as possible, and if you can afford it, it’s always the way to go.
Your lawyer might suggest coming to an arrangement with your tribal lender, in which case they would usually forestall debits to your bank account until you can come up with a payment plan.
☝️ Note that borrowers who complain to their tribal lenders about their products may receive surprisingly favorable responses. For example, the answers to complaints on the Better Business Bureau page for Evergreen Services show that the lender often erases debts in full.
Some lenders don’t want to deal with the hassle of pursuing borrowers who put up a fight, especially if they complain publicly. Because of this, it’s usually worth raising the issue.
Your lawyer may suggest fighting the loan. Usually, that involves:
- Informing your creditor that you will no longer be paying your loan because it’s illegal.
- Closing the bank account you used for the loan and opening a new one.
Whichever option you decide to pursue, don’t let your tribal lender’s scare tactics rush you into anything. Do your due diligence, take your time at each step of the way, and get expert help whenever possible.
📘Learn More: If you’re struggling to keep up with your debts, you’ll probably also find it difficult to afford a lawyer. Here are some ways to get free or low-cost legal assistance: How to Get Free Legal Help.