When people experience tough financial situations and have no savings to get them by, or friends and family to assist, then there are lenders who are available and are more than happy to give you a loan. The truth is, many of them prey on those who are vulnerable and offer to “help” with many strings attached. These are predatory lenders, and you should be aware of them, and learn how to find better alternatives when money is an issue. I will provide a brief overview of the top predatory lending traps.
Pay Day Loans
Pay Day/Cash Advance Lenders will loan you money, with the promise that you will repay them with interest by your next paycheck. When you sign for the loan, you give the lender a post dated check (usually your pay date) with the loan balance, plus any interest and fees. The interest rates on these loans are usually unreasonable, anywhere from 100% of loan amount to greater than 500% YIKES!! If you fail to repay the loan by the agreed due date, then the lender can threaten to cash your check. In addition, if the check bounces, then you will be responsible for paying the financial institution a non-sufficient fund fee, in addition to repaying the lender.
Title Loans allow the borrower to get funds from a lender, by using their vehicle title as collateral for the loan. This means that the Lender will hold on to the vehicle title until the loan, plus any interest and fees are repaid in full. If the borrower fails to pay (regardless of how much is owed, for example $50), then the lender can repossess and sell the vehicle to recoup the loan amount. Interest rates on these loans are often significant.
Rapid Refund Services
During tax season, some tax preparation businesses will offer to pay you a portion of your refund balance immediately (Rapid Refund Lenders). They will pocket the excess refund as their reward for giving you a portion of your refund now. For example, if your calculated refund was $3,000, these predatory lenders may offer to pay you $1,000 cash immediately, and they will request that the full refund be deposited to them, thus earning $2,000 on the $1,000 they paid you. You may ask, why would anyone agree to this? Some people are not willing to wait for the IRS or State Finance Department to send the refund check/direct deposit, and would rather an immediate pay out. They are willing to give up their full refund, to receive some cash NOW. Also, if there was an error made with your tax forms and you find out that you owe the IRS instead of due a refund, you will be responsible for paying both the IRS and repaying the cash refund that was received by the Rapid Refund Lender.
Rent to Own
Just as the name state, people pay rent on an item for a specific time period before they become the full owner of the item. Furniture and appliances are most common to rent to own agreements. These Rent to Own businesses collect weekly or monthly payments, that significantly exceed the cost of the item, should the borrower had paid in cash initially. For example, say a person wanted a dining table set which costs $299 if bought in cash. The Rent to Own business may tell the borrower to pay $10 per week for 52 weeks (1 year), and then they will own the dining table set. At the end of the 52 weeks the borrower would have paid $520 for a $299 dining table set. The borrower should be careful though not to miss a payment. Missing even one payment could result in the Rent to Own business looking to repossess the item, or adding penalties/fees for missed payments.
0% Interest/No Payments Until
You are looking to make a purchase, and the salesperson makes an offer you cannot refuse. Buy an item (furniture, appliance, vehicle, electronics, etc), and pay 0% interest for 12 months or 18 months, or make no payments until 60 days. Wow, this sounds awesome!! If done correctly and you make all your payments within the specified time frame, then this could work in your favor. However, you must understand that these businesses are looking to make money, and are banking on the fact that you will miss a payment. See, most of these deals will structure a payment plan with a minimum monthly balance, that will not result in the item being paid off in full by the time the 0% interest promotional period comes to an end. Hence you may find the 0% interest rate turning to 30% or even more. Better yet, while you are in the 0% interest rate promotional period, you cannot afford to miss a payment at any point in time. Missing even one payment, will result in you paying full interest from when you first purchased the item.
You need some cash now, and you have an item of value that you can use as collateral to get a short-term loan, so you head to the pawn shop. The pawn shop is a predatory lender that lends you about 1/3 or less of the value of the item you used as collateral. You promise to return to pay back the loan amount, plus any interest and fees, and your item will be return to you. If you do not return by the agreed upon date, then the pawnshop has the right to sell your collateral item to cover the cost of the loan, plus the interest and fees, and make additional profit.
The above are some of the common predatory lending traps that exist. They tend to lend to people who are in financial binds and have no where else to go to. It is important to understand the costly consequences of these traps and to think of alternative options to get by. For example, instead of doing a rent to own, look at items at thrift stores which are sold at only a fraction of the cost. Also, save up cash and make purchase only after you have enough to make purchase without owing. Never fall victim to rapid refunds! Do not sacrifice long-term financial benefit just to make a quick buck at a fraction of your full reward.
Remember, these traps are not meant to help you, but to bring you deeper into debt. Be wise, and make good financial choices as much as possible.