the Risks of “Easy Money” Loans
The PA Department of Banking and Securities has received several complaints from consumers about various predatory loan practices, including so-called "payday loans" and auto title loans.
The Consumer Finance Protection Bureau
(CFPB) announced in March of 2015 that it was considering proposing rules that would end payday debt traps by requiring lenders to take steps to make sure consumers can repay their loans. The proposals under consideration would also restrict lenders from attempting to collect payment from consumers’ bank accounts in ways that tend to rack up excessive fees. The strong consumer protections being considered would apply to payday loans, vehicle title loans, deposit advance products, and certain high-cost installment loans and open-end loans. Information about the CFPB’s proposal can be found here
what is an “easy money” loan?
“Easy money” lenders target people who need cash without hassles.
These kinds of loans are in the $100 to $1,000 range, although some go higher. Including interest and fees, these loans demand that you pay 300 to 1,000 annual percent interest (APR), which is illegal in Pennsylvania.
Many of these loans are short-term (due in two weeks to a month) although some loans take years to repay, often with added, unexpected charges. The two videos below from the Federal Trade Commission, explain two kinds of "easy money" lending:
how can you tell if a lender is trying to take advantage of you?
- The lender is not licensed. Call the Department of Banking and Securities at 1.800.PA.BANKS and ask if the company you’re doing business with is properly licensed.
- You are asked to pay fees up front before you receive any money;
- An annual interest rate in triple-digits;
- A quick due date (within a month, or as little as two weeks);
- You put your car at risk by giving up the title;
- The lender doesn’t ask for proof of income or your ability to repay the loan;
- The lender asks for your bank account information;
- You aren’t sure you can actually afford the loan or pay it back on time;
- The fee/interest rate/ loan terms suddenly change;
- You have to drive across state lines to sign papers;
- You cannot get copies of the loan documents;
- You are being pressured to make a decision quickly;
- You don’t know where the loan company is actually located; and
- The lender won’t talk to you or answer questions.
what are the risks with “easy money” loans?
If you can’t repay one of these loans right away, fees quickly add up and after just a couple of months can even go higher than the cost of the original loan.
Here is a real-life example from our files:
My husband and I signed auto title loans last year -- and we so regret doing business with them. At the time of signing, the loan was explained to us as following: a short term loan with high interest rate (just like any other short term loan) - monthly payment to be equally divided throughout the year including interest and principle in it (monthly payments were quoted $548.70 and $473.38) - no additional charges other than GPS tool that was shipped to us (appx $150) and late fees (if payment is late) - no additional charges if we pay it off earlier than a year - no additional payment or charges at the end of year. They presented us ACH application/agreement doc that we e-signed. After a year of paying them thinking this August would be our last month, they basically switched their gear and are telling us that it was an "interest only" loan and we still owe them the principle. And when we asked them to send us the original ACH application we signed, they sent us "Pawn Agreement" that we've never seen at the time of loan signing and they claim the "Pawn Agreement" represents our loan. We are frustrated and desperate... how they lied and misled us, trapping us to this financial fraud, and they are threatening us to pay the loan amount that we didn't even know of or else, they will pawn our cars! Please help us, we would like our loan to be cleared as "paid off", want to get our car titles back, and nothing to do with this company, ever. And this company should not conduct this "scheme" with any other customer in the future.
Borrowers who have taken out multiple short-term loans often find it difficult to keep up with the required fee payments, much less pay down the actual loans. As a result, they are forced to repeatedly extend the existing loans or even take out new loans to pay off the old ones.
what are the alternatives to these types of loans
- Consider the Credit Union Better Choice program. Info available here
- Ask if your bank or credit union offers short-term loans;
- Talk to trusted family or friends;
- Talk to a local community and/or religious organizations;
- Ask your employer for a payroll advance;
- Try to negotiate with your creditor to give you more time or raise your credit limit;
- Pay the late fee: more than likely it will be less than the interest rate on an “easy money” loan.
- I am struggling to pay off a short-term loan: where can I go for help?
Consumers can also call 1.800.PA.BANKS (800.722.2657) to discuss their situation confidentially with a trained professional.
more facts about predatory loans:
- The average loan size for a payday loan is $350 and for a title loan, $950.
- The average car-title borrower renews their loan EIGHT times, paying over $2,000 in interest for $950 in credit.
- Over 275,000 payday loans are taken out per day.
- 14 million people have a payday loan.
- $45 billion dollars have been borrowed in the payday loan arena.
- Here is more information on Auto Title Loans [PDF] from the Center for Responsible Lending.
- Twelve million Americans are trapped every year in a cycle of 400% interest payday loans. A 36% cap on annual interest springs the trap. Learn more...
- Fifteen states plus the District of Columbia have outlawed triple-digit interest.
Other than protecting military families with a 36% APR cap on small predatory loans, Congress has not yet moved to expand reforms across the country, and some big national banks are beginning to get into the business with loans that are virtually indistinguishable from storefront payday loans.
This advisory is being distributed as part of Governor Tom Wolf’s
Consumer Financial Protection Initiative.