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Transcript
COMPARISON OF PREDATORY LENDING AND PROPOSED CREDIT UNION ALTERNATIVES 1 2 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. 3 4 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 5a 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 6 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). 7 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 8 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.