© Denys Bogdanov/Shutterstock.com
For borrowers with good or excellent credit, personal loans are relatively easy to come by and very cheap to finance.
But several court cases and potential government regulation could make personal loans harder to get for consumers with damaged credit. One closely watched case already has had an impact in 3 East Coast states.
These borrowers wouldn't qualify for today's top rates anyway, but now they may be pushed out of personal loans altogether and into higher interest payday loans.
"Subprime and near prime borrowers are the ones who have fewer options available to them to begin with," says Brian Knight, a senior research fellow for the financial markets working group at the Mercatus Center at George Mason University in Fairfax, Virginia. "The odds are better that their next best options are marginally worse."
RATE SEARCH: Find the lowest personal loan rates today. Let Bankrate show you how.
In Bankrate's national survey of interest rates from banks and thrifts for Sept. 14, 2016, the rate on personal loans remained at their low point for the year at 10.68%.
This week's average rate is down nearly three-quarters of a percentage point from its 2016 high. A year ago, interest on the average personal loan was 11.12%.
The lawsuit many are watching
In June, the U.S. Supreme Court declined to review a lower-court ruling in a case involving a woman who opened a credit card with one bank (which later sold her account), defaulted on the card and later sued the servicer that attempted to collect the debt at an interest rate of 27%.
The Madden vs. Midland Funding ruling held that when a bank sells a loan to a non-bank, the new owner may not be able to charge the same interest rate as the bank had. Instead, the new owner must obey the interest rate cap, or usury, laws of the state in which the borrower resides. (A California judge last month handed down a ruling with some similarities, as well.)
This is not how banks typically have to operate when they sell loans to other banks. The rate set by the issuing bank remains in force.
For marketplace lenders -- which are not explicitly affected by this ruling -- there still remains a good deal of uncertainty about whether they will be able to charge interest rates going forward high enough to offset the risk of lending to borrowers with weaker credit scores. So marketplace lenders -- non-bank online lenders who match borrowers with investors, but who may partner with banks to originate loans -- cut back.