Predatory Lending: Be aware and protect yourself

Predatory Lending: Be aware and protect yourself FCS Extension Agent Contact information Developed by VCE Financial Management Team

An extension of Virginia Tech & Virginia State Universities • We Provide • Education • Guidance • Confidentiality • We Don’t Provide • Investment Services • Legal or Marital Advice • Financial Assistance

Who Do Predatory Lenders Target? • Welfare-to-work women • Military personnel • Other low-income working consumers • Others who have little to no savings and live paycheck to paycheck • Elderly

Predatory lending is a trap • Predatory lending is one of the most serious threats to people of color and low-income families • Drains $25 billion of their wealth each year • Checking account customers pay more than $20.3 billion in overdraft fees every year • 73% of that is collected from repeat borrowers

Predatory loan trap cont. • Often wreak havoc on borrower’s finances • Make it difficult to get reasonable loan terms in future • Predatory lenders grant credit regardless of credit history or ability to repay

Selected Interest Rates (APR’s)

Non Mortgage Predatory Loans • Pay day loans • Refund anticipation loans • Car title loans • Overdraft loans • Rent-to-own contracts

1 - Pay Day Loans • Small cash advances, must be $500 or less • Options: • postdated personal check • authorization for automatic withdrawal • Before 2009 typically cost $15 for every $100 borrowed for a two week period • 400% Annual Percentage Rate

Pay Day Loans After 2009 • Limited to 36% APR • One loan Per customer • Data base to be sure you only have one loan at a time • Fees for data check • Have two pay periods to pay it off • Must wait 24 hours after payoff for a new loan

Pay Lenders Answer • Encourage borrower not to take a pay day loan but issue a credit card • No payment for 20 days and then charge interest every two weeks. • Falls under credit card laws. No interest rate cap in Virginia • Law Makers are working to close the loop hole. In VA there are twice as many payday lenders as McDonald’s!

2 - Refund Anticipation Loans • Short-term cash advance against an anticipated income tax refund • Annual Percentage Rates from 40% to over 700% • Usually beat IRS refund processing by 5 to 10 days

Refund Anticipation LoansReal World Example $13,000 Income $161 Tax Prep Fee • $45 Document Preparation Fee • $1 Transmitter Fee • $25 Estimated Bank Fee • $125 Refund Anticipation Loan Fee Total Fees $357

3 - Car Title Loans • Triple digit annual interest rates • Payment within one month • Puts vehicle at risk • Marketed as • “Small emergency loans” • “Sales and leasebacks” • “Motor vehicle equity lines of credit."

Car Title Loans - Procedures • Need free & clear title • Vehicle’s value determined • Loan to value ratio generally less than 33% • Typical loan is 25% for 30 days • $500 loan becomes a $625 debt (300% APR) • Question to ask….

Advice for people with car title loans • Sell it subject to the lien • Borrow from another source to pay off car-title lender ASAP • If loan not an option, cut the losses • If loan is several months old and more owed than borrowed, offer lender lump sum settlement less than what is owed.

Car Title Loans cont. • Virginia is the only state in the union where car title loans are not regulated, restricted, or prohibited outright.

4 - Overdraft Loans • “Bounce” protection loans • Fees $20 to $35 per transaction • Per day fees of $2 to $5 • Borrow using check, debit card or ATM • No disclosure of interest rate • Sold as “customer service” • Actually a “debt trap”

Interest Rate Comparison $80 Overdraft Loan for 1 week

5 - Rent-to-Own Contracts • Merchandise is “rented” (e.g. TV) • Weekly or monthly rent until owned • No interest rate disclosure required • No limit to late fees charged if payment missed • Merchandise usually repossessed

Typical Rent-to-Own Contract

Predatory Loan APR

Alternatives to predatory loans • Savings accounts • Salary advances • Credit card advances • Loans from friends, relatives, religious institutions • Social service agencies • Working out extended repayment plan with creditors • Credit union loans

Selecting A Credit Card • Interest Rates (“APR”) • Annual Fees • Grace Period before finance charges incurred • Other Fees • Late payment • Over the limit • Cash advances Universal Default

So… Are Credit Cards Good or Bad? • Good • Convenience • Emergencies • Protection against fraud • Bad • Can lead to overspending • Can reduce future buying power • Can be very expensive

What Should you Do? ! • Seek out cards with low APR and no annual fee • Sign up for just two cards • Bank card, gas card • Avoid having high credit limits • Leave your card at home when you go out • Protect your card and card number and... Pay your balance in full every month!

For-profit trade schools student loan traps • Some schools have list of preferred lenders • Get kickbacks for directing students to those lenders • Some schools abuse federal student aid policies

For-profit trade schools student loan traps cont. • Don’t keep promises: • Only four of 31 graduates from a MD cosmetology school passed state exam • Only 11% of students enrolled in MD communications school completed program • Many students can’t find jobs, despite schools’ promises of help

What to do? • Consider non-profit schools like NVCC • Ask for list of recent grads to contact about where they found work • Don’t use school’s preferred lenders

What’s Next for You? Determine your financial health. Get an assessment! Call Virginia Cooperative Extension 703-228-6417

“Money doesn't make you happy. I now have $50 million, but I was just as happy when I had $48 million.” • Arnold Schwarzenegger

Predatory Lending: Be aware and protect yourself