Borrower
Beware: The High Cost of Small Loans, Pawnbrokers, and Rent-to-Own
Stores
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.
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