The
five loans that OFE urges consumers to avoid have significantly high interest
rates and fees. Borrowers should always shop around for loans with
reasonable interest rates.
New York State law limits the interest
that may be charged on small loans to 25% per year, but out-of-state companies
may be able to charge higher rates. Always use a lender licensed by
the State
of New York
Refund Anticipation Loans A Refund
Anticipation Loan (commonly known as a RAL) is a high-interest loan usually
offered by your tax preparer. After your tax preparer finishes calculating
your taxes, you'll know your anticipated tax refund (money from the
government). A preparer may offer you a RAL rather than wait for the
government to mail your refund. Expensive fees and interest apply,
reducing the amount of your refund.
An example of a RAL Ava files her taxes at
W&W Tax Prep. At the end of the session, her tax preparer tells her
that she can expect a $2,000 refund but that it could take up to four weeks
to get the money. The tax preparer tells her that she can get the money
today if she signs up for a RAL. Here are the fees: RAL Loan Fee =
$75 Administrative Filing Fee = $75 Tax Preparation Fee = $100 Total
Fees = $250
If Ava takes out the RAL, she will be paying more than 10% of her expected
refund on fees she could avoid by waiting for her refund from the
government. In this example, if the RAL is quicker than the mailed check
by two weeks, the RAL's interest rate would be equivalent to a loan with 300%
annual interest!
Pawnshop Loans Pawnshops accept
personal property, such as jewelry, electronics, cameras, musical equipment or
guns as collateral for loans based on the value of the goods. Most
pawnshops lend less than half of an item's resale value and give you several
months to repay the loan. Pawnshops charge high interest rates until the
loan is repaid. Many pawnshops also charge storage costs and insurance
fees. If the loan is not repaid, the pawnshop can keep and sell the pawned
property.
An example of a Pawnshop Loan Ava pawns her
necklace, valued at $200, at RR Pawnshop for a $100 loan. After one month,
she must repay the loan subject to 5% interest and a 20% storage fee.
These two fees are equal to an Annual Percentage Rate (APR) of 300%! Three
things can happen after one month:
She pays the $125 in full and gets the necklace back.
She pays the monthly storage fee ($20) and keeps the necklace at the
pawnshop. Depending on her loan agreement, RR Pawnshop can charge her
interest in two ways:
Charge 5% interest on the amount that was due ($125), increasing the
repayment amount to $131.25.
Charge 5% interest on the amount borrowed ($100) and add the new
interest payment to the payment that was due, increasing the repayment
amount to $130.00.
She doesn't repay the loan and the pawnshop keeps and/or sells the
necklace.
Rent-to-own Loans Rent-to-own stores
rent appliances, furniture and electronics to consumers for a specified period
of time. After the period ends, you own the goods. However, if you
miss a payment, the store will re-possess the merchandise even if you've already
paid more than the market value (what it's currently worth). Research
shows that approximately 75% of rent-to-own store customers lose both their
money and their merchandise when they can't make payments.
An example of a Rent-to-own Loan Ava sees an ad
that says, "Get a brand-new living room set for only $10 a week!" She goes
into the store and learns the following details: Rent-to-own price:
$10/week for 72 weeks = $720 Purchase price: $300
Stores that provide a Rent-to-own financing service must list the Rent-to-own
total price and the total purchase price. If Ava enrolls in the
"rent-to-own" program, she will be paying more than double the cost of the
living room set.
Cash Advances Cash advances may seem
like a convenient way to get quick cash, but these loans come with a hefty price
tag. Interest rates can be in excess of 20%. Fees are also steep and
range between 2% and 5% of the amount borrowed.
An example of a Cash Advance Ava needs $200 in
cash immediately and takes out a cash advance on her credit card. Her
credit card company charges her a 4% cash advance fee. When she receives
her bill, she will owe her credit card company $208 plus any interest.
Overdraft Loans Most checking accounts
offer overdraft protection - a loan that allows you to draw money from your
account, even if your account balance is $0. On average, overdraft fees
are $30 or $35. Although the fee might seem small, multiple overdrafts -
an all-too-common practice - can result in hefty charges. To avoid
overdrafts, ask your bank to tap into your savings account balance each time you
go over your checking account balance. Typically, there is a fee, but it
is generally less expensive than the overdraft fee.
An example of an Overdraft Loan Ava has $300 in
her checking account and writes a check for $400 to make a car payment.
Since she has overdraft protection, her bank pays her car lender the $400 and
charges Ava $30 for the transaction. Now Ava owes the bank $130 for not
having the $100 extra in her checking account.
There is fine print in loan
agreements that can lead you into deep debt if you're unable to make
repayments on time. Remember to read all of the terms and conditions
of an agreement before signing up for a loan.
The
five loans that OFE urges consumers to avoid have significantly high interest
rates and fees. Borrowers should always shop around for loans with
reasonable interest rates. 
