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Steer Clear of these High Interest Loans

Payday loans have been in the news again recently, as the Consumer Federal Protection Bureau (CFPB) proposes new rules that will force lenders to determine a borrowers’ ability to repay, as well as limit the number of times customers can repeat the loan. Currently, more than 90% of payday loans are repeated an average of seven times, with new fees and penalties added to each renewal. This creates a cycle of relying on high-interest lending and creates a mountain of debt that is almost insurmountable for the consumer.

If approved, this new set of rules will likely not go into effect until sometime in 2017, leaving consumers vulnerable for at least another year. (There are currently 18 states that prohibit the practice of payday lending altogether.) In addition to payday loans, there are other types of high-interest lending that can create the same cycle of reliance on high-interest loans. Here are the types of credit you should avoid at all costs:

Payday Loans — At first glance, payday loans seem like a good option if you’re low on cash and just need a little boost to tide you over until your next payday. Unfortunately, they are anything but innocent. Here’s how they work: the borrower receives a cash loan, and agrees to pay it back on their next payday, along with a “fee,” usually $15 per $100 borrowed.  For example, a $350, 2-week loan would have a fee of $52.50. But when converted to an annual percentage rate, that fee becomes an interest rate of almost 400%! Borrowers who are unable to pay back the loan amount in full, plus interest, after two weeks renew the loan and pay the fee again. When you consider that the average payday loan consumer repeats the same payday loan an average of seven times, they will end up paying back in fees more than the original loan amount received. No matter how you do the math, it never pays to get a payday loan.

Car Title Loans — Another form of high-interest lending, car title loans are short-term loans that use the title to a borrower’s vehicle as collateral. Like payday loans, they have extremely high interest rates (around 300%), fees and heavy consequences for missing payments. In fact, one out of every five borrowers who get a car title loan end up surrendering their vehicles because they can’t pay back the loan.

Refund Anticipation Loans — Most commercial tax preparers now offer the option of receiving a refund anticipation loan, which is really just an advance on your IRS tax refund. While it’s always tempting to get your money sooner, rather than waiting for it, there are a few issues to consider with these refund anticipation loans. The cost of the tax preparation and any service fees will be deducted from the loan, plus if the preparer has made any errors on your taxes, the refund you’re actually eligible for may be less than what you borrow, meaning you will owe money back to the tax preparer. You’re better off waiting for the IRS to send your actual refund amount after they have received and reviewed your return. You won’t be waiting that long; the whole process happens more quickly these days thanks to e-file and direct deposit.

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