Predatory Lending Scams and Fast Cash Gimmicks to Avoid

Predatory Lending:  Scams and Fast Cash Gimmicks to Avoid

It’s a sad fact that there’s always someone out there looking to take advantage of folks experiencing money woes or debt problems.  From short-term loans with astronomical interest rates to less-than-legit prepaid credit card offers, there’s no shortage of predators out there, just waiting to take advantage of people in tough financial circumstances.

These scams and tricks promise financial solutions and quick fixes – but people who opt for them usually just end up worse off — and deeper in debt.  Want to make sure you don’t fall victim to a predatory lender or financial scam?

Here are a few scams and predatory lending practices to steer clear of:

Payday loans.  There is never – and I mean never – a good reason to use a payday lender.  Payday loans are one of the worst kinds of predatory lending, and are designed to generate huge amounts of income for the lender while keeping the borrower locked in a near-endless cycle of debt.

Payday loans work like this: A payday lender (usually a pawn shop, check-cashing place, or specialized payday loan store) provides a borrower (usually someone who needs quick cash for bills, rent, or an unexpected financial emergency) with a small, short-term loan.

A typical amount for a payday loan is around $300 or $400.  In exchange for a quick infusion of cash, the borrower writes the payday lender a check for the amount borrowed, plus a fee. The lender agrees to not cash the check until the borrower receives his next paycheck (hence the name “payday loan”).  If the borrower can’t pay the loan back or wants to extend the loan, he can pay another fee.

You can probably see how this can get out of hand fairly quickly.  The borrower can’t afford to pay back the original loan, so he keeps rolling the repayment back, adding even more fees and finance charges every pay period.  What’s more, payday loans have notoriously high APRs – think 400% and up.  The result?  The borrower gets deeper and deeper in debt – and that original $300 loan may end up costing $3,000.

Car title loans.  Like payday loans, car title loans offer quick cash to people who – due to debt problems or other financial issues — aren’t able to get traditional loans or credit cards.  Unlike payday loans, however, borrowers don’t write lenders a check. Instead, they hand over the title to their car as collateral.

Because the amount of a car title loan is based on the value of your car, it’s possible that you can borrow a little more from a car title lender.  You also have a lot more to lose:  If you can’t afford to pay back your loan, the lender can repossess your car.

My take on car title loans?  Avoid them.  If you’re already dealing with financial problems, there’s a good chance that you’ll have trouble paying back a car title loan – and this could mean that you end up in debt and without a car.

Income tax refund anticipation loans (RALs).  When a tax-prep company offers instant or same-day tax refunds, they’re really talking about RALs, which aren’t refunds at all.  The key word with these loans is “anticipation” – as in, these loans are issued based on what the tax preparer thinks you’ll probably get back from the IRS.  They estimate the amount of your tax return (minus, of course, the fee for your “instant” return) and then they give you a check or prepaid credit card right there on the spot.  Your tax return goes to the tax prep company to cover the cost of your RAL.

I’ll admit that, compared to payday and car title loans, RALs don’t sound quite so bad – after all, it’s your tax return, right?  What’s so bad about getting it early?  Well, a couple things, actually:  First of all, because you pay a fee to the tax-prep company, you reduce the amount of your tax refund.  And second, if you end up getting less money than the tax preparer anticipated, you’re on the hook for the whole amount you borrowed, with interest (this can get even worse if you’ve already spent your RAL by the time your real tax refund arrives).

Do yourself a favor: Skip the tax-prep services and file your taxes online for free through the IRS’ website.  E-filing speeds up the process, and if you opt for a direct deposit for your refund, you’ll get it faster.

Secured card scams.  I mentioned this last month in my blog about secured credit cards, but it’s worth repeating:  While a legit secured card can help you rebuild a shaky credit history, some so-called “secured cards” are simply scams designed to take advantage of folks with debt problems and bad credit.

Want to make sure you don’t fall for a predatory, secured-card cash grab?  Avoid any company that offers a guarantee or promise that everyone is approved, regardless of credit.  Same goes for any secured card offer that makes you call a pay-by-the-minute 1-900 number to learn more.  Be cautious of offers from companies you’ve never heard of – and make sure you read the fine print on ANY secured card offer before you sign up.

Rent-to-own stores.  I understand why rent-to-own furniture and appliance stores are appealing, especially to folks who have bad credit (or no credit):  Since they’re not actually loaning you any money, rent-to-own places don’t do credit checks.  And those small monthly payments don’t sound so bad, really.

Until you do the math, that is.  Let’s say you want a PlayStation 4.  At your typical big-box store, you’ll pay between $300 and $400, depending on the exact package you buy (some are “bundled” with games, some come with extra controllers or more memory, and so on).  Sure, that’s not exactly cheap – but once you fork over the cash, that game console is yours.  Now, let’s say you rent a PS4 from one of those rent-to-own places:  You’re looking at $30 a week . . . for 52 weeks.  By the time you own that game system, you’ll have paid nearly $1600 for it.  Doesn’t seem like such a great deal now, does it?

It’s never easy to struggle with financial problems or debt – but don’t make it worse by falling for a too-good-to-be-true quick fix.  Read the fine print, think about the long term, and work on building good financial habits like budgeting and creating an emergency fund to cover unexpected expenses.

And if you debt advice or have questions about loans, budgeting, or credit cards, you can always reach out to Debt Guru.   Contact the Debt Guru team today for a free debt consultation.