The High Stakes of High-Cost Lending
Check-cashing and title loan companies continue to be a fast-growing area of the financial services industry. These lenders often appeal to individuals and families whose monthly budget comes up short and have low credit ratings, which leaves them few choices when it comes to borrowing cash to make ends meet.
Payday lenders typically allow a customer to write them a check to be cashed at a later date, provided they have a job, a telephone, a personal ID, and a checkable deposit at a bank, credit union, or other depository institution. They will not cash the post-dated check for several days.
Here’s the catch: while the customer may receive a $200 loan on the spot, the lender gets the interest on that loan up front. The customer agrees to repay the $200 in full within a week or two, but actually receives just $150 or $175 for use until payday arrives.
Figured on an annual rate basis that’s an interest rate several times larger than many credit cards charge. If the customers extends or rolls over the loan for additional days, fees will usually be charged for each loan extension.
Title loans are a similar form of high-interest lending. The customer shows the lender the title to a vehicle and continues to drive it during the term of the loan. Using a vehicle as collateral can yield a loan of $500 for a month, but may run close to $100 in interest costs. If the customer fails to repay the loan principal plus interest, the lender can secure the vehicle’s title.
Loans of this type often fall under the terms of the U.S. Truth in Lending Act. This law requires that the lender disclose to the borrower, in writing, the amount of any finance charges and the annual percentage rate (APR) applying to the loan.
Alternatives to Short-term, High Interest Loans
Recently the Federal Trade Commission (FTC) published their own analysis of the check-writing, payday, and title loan industries (see the FTC’s web site at www.ftc.gov). They suggest several alternatives for individuals and families who feel they have few other choices for borrowing money than these types of loans.
The FTC recommends the following alternative credit sources:
- Applying for a small loan from a credit union
- Requesting a salary advance
- Asking trusted friends and family for a loan
- Applying for overdraft protection on a checking account
- Obtaining credit counseling to help with budgeting and bills
If you feel you have been treated unfairly by any lender covered under the Truth in Lending Act or under FTC regulations, contact the lender involved. If you can’t resolve the problem at that level, consider filing a complaint with the Federal Trade Commission at 877-382-4357 or online at www.ftc.gov.