Where do you go for a $10,000 loan when you have bad credit? Don't try a storefront lender. Some are closing their doors. Folks with spotty credit histories who are seeking a quick loan can instead find such options online.
Online payday lenders and credit card companies are rushing to fill the void as banks pull back from subprime lending -- that is loans made to those with less-than-stellar credit. Credit card lending to subprime consumers increased 41 percent from 2010 to 2011, according to credit reporting bureau Equifax.
These options are even more costly to consumers than bank loans of this ilk of the past. But with banks still acting like Scrooge when it comes to lending these days, those with poor credit histories should expect to pay a lot to borrow money. "You have to come to realization that if you're lucky enough to get a loan, you are going to pay more," Howard Dvorkin, founder of Consolidated Credit Counseling Services, a nonprofit credit counseling agency, told The Huffington Post.
Earlier this week the Wall Street Journal reported that subprime consumer lending shops including Springleaf, once owned by AIG, and OneMain, now owned by Citigroup, are closing many of their storefront operations, according to the Wall Street Journal.
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Springleaf, which is in deep debt, is collapsing. With its credit rating classified as "junk," the company is unable to borrow money cheaply enough to make lending profitable, the Journal reported.
OneMain is also struggling to make profits, even as Citigroup has been trying unsuccessfully to sell off its subprime consumer lending arm. Meanwhile, these shops are rejiggering their operations to move away from providing subprime borrowers huge loans such as mortgages and larger lines of credit and instead grant small loans with an average size of $3,000, according to the Journal.
But many of these newer borrowing options assess a steep toll for their loans, such as high-interest rates, shorter payback periods, stiff penalties and fees. And that's the case even though the loan amounts can be small -- from about $100 to $1,000 at most. Some small business owners are also increasingly turning to pawn shops to obtain bigger loans to tide them over or help with cash flow.
Several large banks including Wells Fargo, U.S. Bank and Fifth Third Bank have recently entered the payday business, charging from $7.50 to $10 for every $100 borrowed.
"This is designed for customers in an emergency situation," Wells Fargo spokeswoman Richele Messick told The Huffington Post earlier this year. "It is an expensive form of credit. It is not an answer to their long-term financial needs."
Other options exist for borrowers with weak credit scores, Consolidated Credit's Dvorkin pointed out. A credit union is more likely to offer a borrower a hands-on approach, he said.
Another option to raise cash fast is to borrow from friends as long as there is a real loan agreement in place, advised Laura Creamer, a financial education specialist, with nonprofit credit counseling group CredAbility.
Other ideas include selling or pawning something of value like jewelry, a vehicle or even collateralizing an investment or piece of real estate, Creamer and Dvorkin said.
Dvorkin suggested that it's easier to get a loan using as collateral an item like real estate or stock as opposed to portable items such as a diamond ring, a vehicle or other items that can easily be transported.
Said Dvorkin: "Lenders don't like things with 'feet.'"