Abuses by Some Small Loan Lenders
- Some lenders charge very high interest rates.
- Most lenders will also add fees to the cost of the loan and try to sell you
insurance. These extras make the loan even more profitable to the lender and more costly
to the borrower
- Some lenders make it hard for you to figure out how much the loan is really
going to cost.
- Some will encourage you to borrow from them over and over -so they can make more
money
The High Cost Of Different Kinds Of Small Loans
PAYDAY LENDERS
Some check cashers will offer to take a personal check from you or from someone else
you know. The lender will hold that check and not cash it for one or two weeks. In return,
they will give you an amount of cash that is less than the written amount of your check.
Sometimes, the lender will charge another fee on top of the interest.
At the end of the two weeks, you must either pay back the full amount of the check
(more than what the lender gave you), or the lender will cash the check. Often, the lender
will try to get you to write another check in a larger amount and give you little or no
cash back. In this way, the lender gets more money from you and you get further in debt.
The difference between the amount of your check and the amount of cash you get in
return is interest that the lender is charging you.
For example:
- You write a $256 check. You get a $200 loan back. This means you paid $56 in
interest. That is 681% on an annual basis!
Compare this to annual interest rates as low as 10-15% that banks and finance companies
charge.
PAWNBROKERS
Pawnbrokers are companies that allow you to trade something of value such as jewelry, a
stereo, or even your car, in exchange for cash. Usually, a pawnbroker will lend only
one-half of the value of your property. You must pay back the loan within a certain period
of time or the pawnbroker can sell your property and keep the money. Since you are charged
fees, and only receive at most 1/2 of the value of your property in cash, you may be
paying up to 200% interest per year.
PAWNING YOUR CAR TITLE
Some pawnbrokers will allow you to keep the use of your car but take the paper that is
your title to the car. In exchange, you will get cash; but, again, no more than one half
of the car’s value. If you do not repay the loan, the pawnbroker will find your car,
take it, and sell it. If you can make all the installment repayments, the pawnbroker still
makes quite a profit off you. For example:
- You give you car title ($1,000 value) - $500 loan you get back
- You pay weekly installments of $103.30 for 10 weeks
- $103 X 10 weeks = $1,033
- $1,033 you pay - $500 you get — $533 interest you pay (830% on an annual
basis)
RENTING A TV, STEREO, FURNITURE, OR APPLIANCES
When you go to a store and rent these items instead of buying them, you will often pay
at least three or four times what it would cost to buy them. For example:
- You rent a 19-inch color TV ($300 value)
- You pay $16/week x 52 weeks = $832
$832 (you pay) -$300 (value of TV you get) = $532 interest you pay (254% on an
annual basis)
Sometimes the rent-to-own company will rent you a used TV and tell you it was new.
Then, they make even more money from you. And if you miss a payment, the company may
repossess the TV, leaving you nothing to show for all of the payments you made.
WHAT ARE LOANS?
A loan is borrowed money which must be repaid in one or more payments. Lenders charge
interest on the amount you borrow. This means that you pay back more than you receive.
This is how a lender covers the cost of doing business and makes a profit. The higher the
interest rate, the more you must repay. You should know that the lower the monthly
payment, the longer it will take you to repay the loan and the more you will pay to borrow
the same amount at the same interest rate. COMPARE:
- You borrow $500 at 18% interest for 12 months
- You pay $45.84/month x 12 months
- $500.00 principal (you get)
- $50.08 interest (you pay)
- $550.08 total to repay
- You borrow $500 at 18% interest for 24 months
- You pay $24.96/month x 24 months
- $500.00 principal (you get)
- $99.09 interest you pay
- $599.09 total to repay
Sometimes, you may need to borrow a few hundred dollars because of an unexpected
12:57 PM 8/2/2002medical bill, broken appliance, or to buy a used car to obtain or keep a job. While the
amount of cash you may need is small, the amount of interest you will repay may be large. ALWAYS
SHOP AROUND.
What You Can Do To Avoid Problems:
- Save now for unexpected expenses. Even putting aside a small amount each week
will help: Try to save your money before there is an unexpected expense so that you can
avoid borrowing. You can talk with budget counselors who can help you understand how you
spend your money each month and how you might save.
- Shop around: Do not look just at the monthly payment. Compare the interest rate
(also called the “annual percentage rate”), the total amount you will repay, the
number of payments, and the amount of fees added on to the loan.
- Read before you sign: Make sure you or someone you trust reads the loan papers
before you sign them. If the lender will not let you take them home to study them and
tries to rush you, walk away. That is a sign of trouble.
- Alternative credit: If you open an account at a credit union (which is like a
bank and is backed by the federal government), you can get a small loan at interest rates
of 10-20%, instead of the 254%-830% (for pawnbrokers and rent-to-own stores) or 681% (for
the payday loan).
If you need a loan to start up a small business, there may be a non-profit organization
in your area which can help.
WHERE ELSE TO GO FOR HELP?
If you borrowed money from one of these lenders and want to
know your rights, you may get free assistance from your local legal services office.
NCLC is a consultant for lawyers and others on consumer issues affecting low and
moderate income Americans. This brochure was supported, in part, by a grant from the Emma
Lazarus Fund of the Open Society Institute.
