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Some Pitfalls of Predatory Lending

Some Pitfalls of Predatory Lending
October 26, 2015 Paul Woodruff

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Predatory lenders are defined as lenders “that impose unfair or abusive loan terms on a borrower.” The benefit of such transactions belongs to the lender rather than the borrower in most cases. Typically, they will use exploitation and deception to market their lending products to those who may be unable to afford the terms of repayment. Taking this information into consideration, let’s take a look at some different types of Predatory Lenders.

Payday Loans

Payday Loans are granted for approximately two weeks until the borrower’s next pay date. In order to ensure the funds will be returned plus interest, the borrower must leave a post-dated check to be cashed on payday or provide checking account information with permission for withdrawal on an agreed upon date. A report on Predatory Lending in the state of Missouri shows Payday Lenders typically charge 444% APR, or annual percentage rate, for an average loan of just over $300. The goal for the companies to remain profitable is to create long-term, repetitive customers rather than meet needs on a short-term, one-time-only basis as advertised. In fact, 75% of loans are from repeat borrowers. Borrowers who default on this type of loan are in serious danger of excessive fees and aggressive debt collectors regardless of the amount of payments made on the existing loan.

Title Loans

Title Loans are cash loans secured by the title of a vehicle that has been paid in full. The borrower agrees to terms which typically include an expedited repossession process for non-repayment. The APR on this type of short-term loan is typically 300% in Missouri within a 30-day cycle. On average, the borrower renews the loan eight times, according to the Center for Responsible Lending.  Borrowing $1,042 against a vehicle worth approximately $4,000 will result in a total repayment amount of nearly $3,400. If repayment is not complete within the allotted time, the vehicle owned outright by the borrower is repossessed.

Rent-to-Own Companies

Rent to Own appears harmless as a simple agreement for a renter to become a buyer by paying a rental fee for a set length of time. Usually they require little to no credit without saving for a down-payment. The danger is that consumers using Rent to Own options often pay more than double for owning the rented products rather than saving to purchase them. Examples of what type of products that might be found in a Rent to Own agreement are washers and dryers, televisions, couches, and homes. University of Missouri Extension shares a realistic comparison of a television purchase. The total cost of the television is $581 with taxes included when paying cash or debit, but the same television would cost $1,422 in a Rent to Own agreement. The Rent to Own option requires payments of over $18 per week for 18 months while saving the same amount per week results in completion of the savings goal in 8 months to pay cash for the same purchase. The item can be repossessed if payments are not made; often times, the repossession takes place within three weeks of the last payment received by the Rent to Own Company.

Tax Refund Anticipation Loans

Refund Anticipation Loans are loans made based on the anticipated amount of a federal income tax refund and are generally offered January through the end of tax season in April. The consumer receives the loan in the amount of the anticipated tax refund minus interest and associated fees whereas they would receive the full amount of the refund typically within 21 days if requesting direct deposit from the IRS. Taxpayers who receive a Refund Anticipation Loan are charged 10% of their refund on average to receive their money days earlier than if they waited to receive it from the government, and they will still owe the difference if the refund is lower than originally anticipated.

By Meghan Northcutt, AFC® Candidate, FFC Candidate