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COMPARISON OF PREDATORY LENDING AND
PROPOSED CREDIT UNION ALTERNATIVES
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Predatory Lending Example
Payday Loan: A person borrows $100
until the next payday. The lender
provides a two-week loan and charges a
$15 fee. The lender will require the
borrower to provide a postdated check
for $115 to be held until the borrower’s
next payday. When the loan comes due,
the borrower may repay the loan by
allowing the lender to process the check
or by bringing in the full payment of
$115 in cash. The borrower may also
have the option to “roll over” the loan
by taking out another loan and paying an
additional $15 for another two weeks. In
this example, the annual percentage rate
(APR) calculates to 391 percent for the
original two-week loan of
$100 with a $15 fee. The APR is
typically not disclosed.
Predatory Lending Alternative
Small, short-term unsecured loan
at 18% APR, with no fees. Credit
unions are prohibited from
granting loans with interest rates
exceeding 18 percent;
or
Small, short-term unsecured loan
at 18% APR, with a nonrefundable loan application fee of
$10.00. The fee applies to all loan
applicants, whether or not the loan
is granted, and thus is not included
in the finance charge.
Predatory Lending Example
Car Title Loans: Many pawnshop
brokers offer car title loans (and some
businesses specialize in this type of loan).
In return for these loans, you give the
pawnshop or business information about
yourself—and the title to your car. The
amount loaned is usually only a small
portion of the value of the car.
Predatory Lending Alternative
Small, short-term loan of $1,000
at 10% APR for a term of 12
months, with the borrower
providing his used car as collateral,
which the credit union perfected a
lien /security interest.
Borrower receives $1,000 loan from a
pawnshop (the car was worth $5,000),
and gave the pawnshop the title to the
car. The borrower promised to pay the
loan in 6 months. The pawnshop
Small, short-term unsecured loan
of $1,000 at 18% APR for a term
of 12 months.
or
COMPARISON OF PREDATORY LENDING AND
PROPOSED CREDIT UNION ALTERNATIVES
charged 10% interest on the loan per
month, plus the loan amount. After 5
months, the borrower missed a payment.
The pawnshop immediately repossessed
borrower’s car and charged a fee of
$50.00. After another month, the
borrower got the money to pay the loan
amount in full, plus the $50.00 fee.
However, the borrower had to pay
another $150.00 for storage costs to get
the car back. Total cost to get car back
was $1,800 ($1,000 for loan principal,
plus $600 in interest, plus $50 repo fee,
plus $150 storage fee). The borrower
was shocked to learn that the effective
interest rate was 80% for 6 months, or
160% per annum.
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Predatory Lending Example
Pawnshop Loans: Pawnshops will loan
you money if you leave an item with
them, such as jewelry, firearms, cameras
or electronic devices. Usually, the shop
must keep your item for 30 days. Within
that time, you must repay the loan. If
you don’t, the pawned item belongs to
the store, and it is put up for sale. Loans
from the pawnshop are usually less than
half the value of the item. That means
you are borrowing a fairly small amount
of money and risk losing a possession of
much higher value.
Predatory Lending Alternative
Small, short-term unsecured loan
up to $500 at 18% APR, with a
non-refundable loan application
fee of $10.00.
Predatory Lending Example
Easy Money Mortgage Refinance Offers:
Some companies tempt you with offers
to refinance your mortgage. That means
you trade in your existing mortgage (pay
it off) for a new one. Refinancing
Predatory Lending Alternative
Mortgage refinance at market
interest rate, loan to value ratio up
to 80%, with a small nonrefundable loan application fee,
affordable closing costs and no
COMPARISON OF PREDATORY LENDING AND
PROPOSED CREDIT UNION ALTERNATIVES
companies may promise to put some
additional fees
cash in your pocket now. But remember,
these businesses will likely charge you a
high interest rate on their loan, plus fees.
The fees are what you really need to be
aware of when looking at very tempting
offers to refinance your mortgage. And
most companies will say, don’t worry
about paying any of the fees up front –
we’ll just add it onto your mortgage
balance. This means if the mortgage is
15-30 years in term, you will be paying
interest on those fees over time
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5b
Predatory Lending Example
Rent-To-Own Stores, such as Rent-ACenter (RAC) – Example #1: TV set
costs $300 plus tax in a department
store, but can be purchased with an easy
payment plan in a Rent-To-Own Store;
Weekly rental is $11.95 plus 1.03 cents
for sales tax, which totals $12.98; The
contract for the TV runs for 78 weeks;
The actual total cost for the easy
payment plan TV is $1,012.44—more
than three times the price in the
department store.
Predatory Lending Alternative
Short-term (up to 18 months)
unsecured loan at an APR of 18%
or less.
Predatory Lending Example
Rent-To-Own Store, Example #2:
Washing machine costs $399 in an
appliance store, but can be purchased
with an easy payment plan in a Rent-ToOwn Store; Cost to rent is $14.99 per
week for 74 weeks; The total rental cost
is $1,109.26, nearly three times as much
as it would cost to buy the washing
machine.
Predatory Lending Alternative
Short-term (up to 18 months)
unsecured loan at an APR of 18%
or less;
or
Purchase item with your credit
card, but you might have to pay
interest of 15-20% or more.
or
Purchase item with your credit
card, but you might have to pay
interest of 15-20% or more.
COMPARISON OF PREDATORY LENDING AND
PROPOSED CREDIT UNION ALTERNATIVES
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Predatory Lending Example
Check Cashing Store: Consumer cashes a
check for $100, but must pay a fee of
$8.00, leaving the consumer with only
$92.
Predatory Lending Alternative
Member can get their check cashed
at their credit union for free;
or
Member receives a check for a
share withdrawal from their credit
union, and can take the check to
the local bank where the credit
union maintains its checking
account, in order to get the check
cashed at no change (credit union
makes this arrangement with their
local bank).
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Predatory Lending Example
Credit Card Debt – Special Offers:
Using credit cards to establish a good
credit history is a sound business
decision; Although credit card offers and
solicitations are perfectly legal, if a
consumer does not use credit cards
wisely, they can get into serious financial
trouble. Thus, credit cards can end up
being a legal form of predatory lending.
Rolling over credit cards or transferring
balances into 0% or low interest offers is
only a short-term solution, as these
offers are only good for a very short
period of time, then the rate goes much
higher.
Predatory Lending Alternative
If your credit union offers credit
cards, you may be able to obtain a
credit card at your credit union,
which carries a lower interest rate
and little or no fees.
COMPARISON OF PREDATORY LENDING AND
PROPOSED CREDIT UNION ALTERNATIVES
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Predatory Lending Example
Secured Credit Cards: These operate just
like a regular credit card, but you are
required to make a deposit against the
credit limit on the account. In addition,
secured credit cards usually have fees that
regular credit cards do not. These
include application, processing and
annual fees.
Predatory Lending Alternative
If your credit union offers secured
credit cards, you may be able to
obtain the card at your credit
union, which carries a lower
interest rate and lesser fees.