You are here: Features Remar's Report Avoiding "Loan" Schemes And Other "Services" Risky To Your Financial Well-being

Avoiding "Loan" Schemes And Other "Services" Risky To Your Financial Well-being

December 2008risky-loan

Economic hard times such as the nation is now experiencing bring out the schemes and scams that aim to make a buck on people who may be feeling pressure financially and who are unwary. In the last few weeks, I have seen dozens of ads and email solicitations for “opportunities” that could wreck an already stressed budget. So this month’s report details 1) some schemes and scams to avoid always and 2) some services that may be helpful in certain circumstances but that you must choose wisely how to use.

"Loans" and Other "Services" to Avoid

Car Title Loans

Car title loans are typically marketed as short term emergency loans. These loans are secured by the title to the borrower's vehicle and are usually for an amount much less than the value of the vehicle. Generally, the borrower must own the vehicle free and clear. Loan amounts are based on the value of the vehicle and can be up to 50% but rarely exceed 33%. The borrower may even have to provide the lender with a set of keys to the vehicle.

The loan term is usually one month. The annual percentage rates (APR) of these types of loans can be well into triple digits. In addition, there are usually fees and other charges. Many loans are renewed because the borrower can't repay the loan when it comes due. With the renewal of the loan comes more fees and charges which can add up to more than the original loan amount. These loans typically must be paid back as a lump sum, not in installments. If the loan isn't paid back, the lender takes the vehicle, sells it, and may keep all the proceeds from the sale.

These loans are widely available on the Internet and take advantage of the laws in states that have not limited interest rates or prohibited them.

Bottom line: If you have need of a short term loan, a personal loan or a secured loan might be a better choice. Talk to BayPort about your options.

For more information check out Car Title Loans from the FTC and the Center for Responsible Lending.

"Loans" and Other "Services" to Avoid

  • Car title loans
  • Payday loans
  • Credit Repair
  • Foreclosure Rescue
  • Phone health insurance programs
  • Mortgage teasers

Choose How You Use

  • Rent-to-Own Stores
  • Pawnshops
  • Balance transfer offers
  • No interest, no payments offers

Payday Loans

Payday loans are small, short-term loans with high interest rates. These loans go by several names: payday loans, cash advances, check advance loans, payroll advances, deferred deposit loans, or post-dated check loans. The loan is secured by a post-dated check or electronic checking account information.

A typical loan is for under $500 and has a term of two weeks. Finance charges per $100 borrowed typically ranges from $15 to $30. Even though most states have taken steps to regulate the industry, many APRs remain in the triple digits. If the borrower can't pay back the loan at the end of the term, then the lender typically "rolls" (extends) the loan by charging new fees for the next loan period or "flips" the loan by writing a new loan (with new fees) to pay off the previous loan. Paying off the loan and immediately taking out another is a ploy called "touch-and-go" or "back-to-back" lending that evades some states' regulations of loan rollovers. If the lender deposits the check (or withdraws the payment), when the borrower doesn't have enough money in their account to cover the check, the borrower will also incur bank and lender fees for the bounced check.

Borrowing from an Internet lender poses an even greater risk. For a typical online payday loan, the borrower has to provide their checking account numbers, routing number, and personal information such as Social Security number, birthday, and mother's maiden name. With all this information, a lender has open access to your account. Nothing prevents an unscrupulous lender from continuing to take your money by making multiple charges, making unauthorized charges, or automatically renewing the loan. This information can also be used for identity theft.

Bottom line: If you have need of a short term loan, a personal loan or a secured loan might be a better choice. Talk to BayPort about your options.

For more information check out Payday Loans from the FTC and the Center for Responsible Lending.

Credit Repair

These so-called services advertise that they can help you raise your credit score by cleaning up your credit, for a fee. Some of their tactics include creating a new credit identity, erasing bad credit, and piggybacking. In addition to costing you hundreds or thousand of dollars, these tactics can also get you into trouble since most are illegal.

Bottom line: Only time can remove accurate information from your credit report. (If there is inaccurate information, you can take the steps set up to dispute the information.) General credit information—good and bad—remains on your credit report for seven years. Information about most types of personal bankruptcy remains for 10 years. Information about a financial judgment against you remains for the longer of seven years or until the statute of limitations runs out. 

For more information check out Credit Repair: How to Help Yourself from the FTC.

Foreclosure Rescue

Foreclosure rescue or foreclosure assistance firms claim they can help you save your home, of course for a fee. These scammers use various tactics to take lots of your money and even your home. A common tactic uses deception to get you to sign over your home to them usually without your knowing that's what you've done. Another common tactic is to get you to make your mortgage payments to them—they take the money and don’t pay your mortgage lender.

Bottom line: At the first sign of trouble, the most important step you can take is to contact your mortgage lender. The longer you wait, the fewer options you’ll have to prevent foreclosure. If you hold an BayPort mortgage, call them to discuss your situation and their various wellness programs.

For more information check out Mortgage Relief Scams from the FTC.

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Phony health insurance programs

If you work for yourself, your employer doesn’t offer health insurance, or you’ve lost employment and have exhausted your COBRA, you are among the large numbers of Americans who have to find their own health insurance. Finding coverage for yourself and family can be difficult and expensive. A group health insurance plan can provide lower premiums than an individual policy; so that’s what savvy consumers usually shop for. Scammers take advantage by offering phony insurance through real or bogus associations. This scam alert from the Coalition Against Insurance Fraud describes these scams in detail.

Bottom line: If you're looking for health insurance, compare health plans, particularly group plans, very carefully. Check what the plan covers. Look for such things as hospitalization, in-patient and outpatient surgery, office visits, lab tests, medical equipment, mental health care, physical therapy/rehabilitation, and prescription drugs. The best plan covers all of these. Look for any limitations to the coverage. For example, some so-called affordable plans limit the number of office visits that are covered per year—some are as low as 3 or 4. Consumer Reports has a worksheet (pdf) that can help you compare plans.

For more information check out Understanding Private Health Insurance (pdf) from the National Endowment for Financial Education (NEFE) and Georgetown University's Health Policy Institute. This is book one in the series Managing Medical Bills: Strategies for Navigating the Health Care System.

Mortgage teasers

Even after the housing bubble burst and the following recession, ads for questionable mortgages (those that helped create this mess) are still all over the Internet and in your email. These advertise "very low rates," "very low payments," and "low fixed rate." What most of these ads don't say is that their terms are dangerous for your budget. Many of these are offering very risky mortgages, such as interest only mortgages, and option adjustable rate mortgages. Most of these advertisers also aren’t lenders but “aggregators” who send your information out to potential lenders (which are mostly subprime and few in number these days).

Bottom line: Don't fall for these teasers. If you're in the market for a new home or need to refinance your current mortgage, then talk to BayPort about your mortgage options. They can help you find the best mortgage for your situation.

For more information check out Deceptive Mortgage Ads from the FTC.

Choose How You Use

Rent-to-Own Stores

Rent-to-Own stores have televisions, appliances, furniture, computers, and jewelry that consumers may rent for a weekly or monthly payment. The consumer has the option to buy the item at the end of the term. The consumer may also return the item at any time without having to make any more payments.

If you need to rent an item for a short term (you need an out-of-town apartment for two months or you want a big screen TV for the big game), this may be an acceptable option, even though the rental fee (the payment) may be a bit high.

This is not a good option if you want to buy the item. Because the rent-to-own stores consider the transaction a lease, they do not tell you that the interest rate (APR) on the "purchase" is typically in the triple digits. For many items, the consumer will pay more in interest and finance charges, than the item actually costs.

Bottom line: If you want to purchase an item, consider these alternatives: 1) Save for it. Instead of paying a rental fee, deposit that money in a BayPort savings account and purchase it when you've saved enough. 2) Use a credit card. Even if you take several months to pay it off, you'll pay less interest. 3) Get a small loan. BayPort offers personal loan options for any reason at competitive rates. 4) Buy it used at a thrift store, consignment store, or garage sale.

Pawnshops

Pawnshops accept personal property as collateral for loans that are based on the value of the property. Pawnshops accept a variety of items such as jewelry, computers, TVs, cameras, various other electronics, tools, sporting goods, and musical instruments.

Typically, the borrower receives 33% of the item's value with the maximum loan amount less than 50%. The loan is usually for 30 days, but may be extended. Interest rates can vary and can be high. The item is redeemed when the loan is repaid. If you don't repay the loan, then after a certain period of time the pawnbroker keeps and sells the item. Pawnshops are regulated by each state, which limit the interest that can be charged, and the amount of other changes, such as handling, appraisal, storage and insurance fees that can be added.

If you're looking to purchase an item, pawnshop merchandise may be a bargain—if you know the regular retail and general used values of the item and can compare. Many pawn shops also sell new merchandise and this may or may not offer savings.

Bottom line: If you have need of a short term loan, a personal loan or a secured loan might be a better choice. Talk to BayPort about your options.

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Balance transfer offers

Transferring a balance from a high-interest rate credit card to a lower-interest rate credit card may seem like a smart idea. It is if you do your homework. The details of a balance transfer offer can be loaded with traps. Check out a balance transfer offer by looking for answers to these questions:

  • What is the time limit of the offer? Most offers last from 3 to 12 months.
  • What will be the interest rate when the time limit expires? With some offers this can jump into the 20% range.
  • Does the low-interest rate only cover the transferred balance or does it apply to new charges as well? For most offers, there's a higher interest rate for new purchases.
  • What is the balance transfer fee and is there a maximum fee? A fee of 3-4% of the balance transferred is typical with a maximum fee of $50 but more and more cards no longer have a maximum. A transfer fee can substantially increase the cost to transfer your funds (figure that fee into the interest rate and see what effective rate you get).

Bottom line: Before taking advantage of a balance transfer offer, read all the details with a magnifying glass—especially the fine print—not just once but several times.

No interest, no payments offers

Financing offers with "no interest, no payments" teasers may sound like a good deal but the fine print almost always hides a catch. Watch for these typical strings:

  • You must apply for a store credit card. And there's no guarantee that you'll qualify for the offer. Also the store credit card often has a high APR.
  • Interest accrues from the date of the purchase, usually at a high interest rate. If you don't pay off the balance by the due date, then you'll have to pay all of the interest that has accrued on the total amount of the loan from day one.
  • A minimum purchase is required. In many instances, the minimum purchase may be $1000 or more.
  • High interest rate. Store credit cards typically have higher interest rates and in some cases much higher interest rates than credit union and bank issued credit cards.

Bottom line: Take your time and read the fine print. If you decide to take advantage of one of these offers, know the payment due date and make sure that you pay it off well before that date.

Help When You Need It

In tough economic times, we consumers may need financial services that help us manage. The first place to look for the financial services you need is your credit union.


Reviewed and updated August 2014.

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