Tribal loans are short-term loans issued by a lender based on tribal land that is owned and operated by the Native American community. These loans have had their fair share of controversy because some tribal lenders claim immunity from federal and state laws. They are often presented as an alternative to payday loans. However, tribal loans charge expensive fees and interest rates that are similar to payday and title loans.
This article provides a detailed guide on how tribal loans work and how they compare to other lenders. However, the bottom line is that tribal loans are a last-resort source of credit. Avoid tribal loans unless you are in a real emergency, and you have explored other options, such as getting a second job, selling stuff you no longer need or borrowing from your family and friends.
If you plan to apply for a tribal loan, find out if you qualify for a regular personal loan first by completing this short survey. You may be surprised by the rates and terms you can get. It will not hurt your credit score, and it only takes two minutes to complete. To illustrate, the lenders below will consider applications from borrowers with a poor credit score.
What is tribal sovereign immunity?
Tribal sovereign immunity is a protection that enables Indian tribes and their entities to regulate their own affairs in a way that benefits the tribe. Recently, some payday lenders and other non-tribal lenders have created links with tribes to benefit from tribal immunity and sidestep state usury laws.
How do tribal loans differ from regular short-term loans? And what advantages do they offer? Let’s take a closer look.
What is a tribal loan?
Tribal loans are usually marketed as an alternative to payday loans for emergency cash loans. Like casinos built on tribal land, tribal lenders operate under tribal sovereignty rather than state law. This lending structure is similar to the “rent-a-bank” setup since shut down by various federal regulators in the 2000s, that allowed payday lenders to partner with out-of-state banks to benefit from the banks’ ability to apply interest rates that were legal in their state but illegal under payday lender’s state law.
What is NAFSA?
Established in 2012, the Native American Financial Services Association NAFSA represents about a dozen tribes involved in online small-dollar installment lending.
Tribal lending began with the rise of financial technologies (FinTech) over the past decade, explains Clifton Cottrell, Director of Policy and Research at NAFSA.
Cottrell says, “For tribes geographically and economically isolated, e-commerce represents an opportunity for Native communities to connect with consumers across the United States.”
NAFSA loans are typically easier to acquire than conventional personal loans and offer more flexible payment programs. However, they also charge higher-than-average annual percentage rates (APRs).
Tribal lending vs. payday lending
Many refer to NAFSA members’ Tribal Loan Entities (TLEs) loans as payday loans. However, this nomenclature is deceptive — tribal loans are more like installment loans than payday loans. While they both have extremely high APRs of payday loans, their more flexible payment structure makes them a safer choice for borrowers.
According to Cottrell, tribal online installment loans have specific advantages over storefront payday loans. Small-dollar installment loans are structurally similar to conventional loans, in which a portion of the principal and interest are repaid each period.
“This provides borrowers more flexibility month to month, instead of one large lump sum repayment characteristic of payday loans.
Typical small dollar installment loans range from $500-$2000 with repayment periods between six months and two years.” Also, unlike payday loans, installment loans do not magnify their costs with rollover fees.
Payday loans are known for propagating a cycle of debt, or “loan churn.” But the well-defined installment payments of tribal loans all go directly to paying off the principal debt. This makes tribal loans a much safer and less exploitative option than payday loans.
However, tribal loans are still expensive forms of credit. Although they offer larger loan amounts and more flexible repayment plans than conventional loans, they also charge higher-than-average APRs. As such, you should only apply for tribal loans in emergencies when other cheaper sources of credit are not available.
Eligibility for tribal loans
To secure a tribal loan, you need not be part of a Native American tribe. Tribal loans are available to all.
Cottrell says each of NAFSA’s tribal lending members set their own eligibility requirements to secure a loan. Most lenders will set age restrictions (e.g., requiring borrowers to be 18 or older) and employment restrictions. They will also typically require the borrower to verify that they have a bank account.
To borrow from NAFSA lenders, borrowers must:
- Confirm their employment status.
- Possess a verified bank account.
- Make an average income of over $40,000/year.
- Have their average span of indebtedness last less than two months.
The average NAFSA borrower is a middle-income American who can’t get a loan from mainstream lenders and wants to avoid payday loans.
Advantages of tribal loans
Many Americans cannot secure loans from traditional lenders. A survey conducted by The U.S. Census Bureau and FDIC revealed that 27% of Americans either have no bank account or they are “underbanked. “
In other words, they have a bank account but still rely on alternative financial sources. This means that the traditional lending system neglects over 65 million adults.
Payday loans are one option for this group. However, these loans can be predatory and throw borrowers into an endless cycle of debt. The TLEs of NAFSA provide options for these underserved Americans, offering a safer alternative to payday loans.
Cottrell explains that NAFSA’s TLEs use unique credit algorithms that allow them to assess creditworthiness without conventional credit scoring procedures.
Beware of posers
You cannot trust all lenders that offer tribal loans. Some lenders claim to be tribal lenders to avoid the rules and regulations applied to payday lenders.
In 2016, California won a case involving lenders who claimed tribal status to sidestep state laws. These lenders demanded immunity due to their affiliation with the Miami Tribe of Oklahoma and the Santee Sioux Nation of Nebraska.
Although the lenders were tribal entities in name, the court ruled that they had little real connection to the tribes. The court found “scant evidence that either tribe actually controls, oversees, or significantly benefits from the underlying business operations of the online lenders.”
TLEs that are members of NAFSA must comply with best practices on lending, operations, marketing, and payments.
Any member of NAFSA has gone through a full business licensing process and must abide by a strict tribal council approved lending code. NAFSA’s lenders have also each set up an independent regulatory commission.
Non-NAFSA certified lenders who claim to offer tribal loans might not offer the same “above board” business practices. Be wary and give priority to NAFSA certified TLEs.
Examples of tribal lenders
SuperMoney offers information about several tribal lenders. Read about different companies, including Blue Trust Loans, Big Picture Loans, and Great Plains Lending, to name a few.
However, we do not recommend using a tribal loan unless it’s an emergency and you have explored all other options. Other options include borrowing from friends or family, getting extra work, or selling things you don’t need. It is possible to get money without paying high interest rates and fees.
If you are looking for a personal loan and have poor credit, check out the best personal loans for you before deciding.
Andrew is the Content Director for SuperMoney, a Certified Financial Planner®, and a Certified Personal Finance Counselor. He loves to geek out on financial data and translate it into actionable insights everyone can understand. His work is often cited by major publications and institutions, such as Forbes, U.S. News, Fox Business, SFGate, Realtor, Deloitte, and Business Insider.