Thursday, May 30, 2013

Empty pockets — interest like a rocket

What Was That Interest Rate?

You’ve probably seen the ads on TV. You know; the ones with a recognizable spokesperson imploring you to call the 800 number and have cash in your account almost instantly.
These loans are commonly known as Payday Loans and although they charge exorbitant interest rates, folks desperate for a short-term loan seem to disregard that detail. The theory is to owe the money for only a few days, so the interest won’t amount to much.
If you think your 29.99 percent credit card rate is high, try 149 percent on for size.  Think that’s outrageous? That’s actually the lowest of the rates I’ve seen on Payday Loans. The highest? 476.09 percent. No, that’s not a misprint.  I guess 476 percent wasn’t quite enough so they had to add another .09 percent.
Is this legal, you may ask?
Usury, the illegal action or practice of lending money at unreasonably high rates of interest, is not allowed by corporations or individuals, but if you’re a sovereign nation, it seems you’re immune to usury laws.
I recently had the opportunity to review several of these loans, so what I’m stating here are factual examples, hard though they may be to believe. For instance, one loan of $1,000 carried a $500 origination fee. So from the instant the borrower received $1,000 he owed $1,500 on which he was being charged 149 percent for an APR of over 200 percent. Another loan of $320 carried a $120 monthly service fee plus an interest rate of more than 400 percent. In addition, these loans carry stiff penalties if not paid back on time.
Our government recently limited Payday Loan interest rates for military personnel. They still allow advertising right on base, but they’ve capped the interest rate at 36 percent. I know I’m on a soapbox here, but that’s what we consider being kind to our troops? And if it’s unfair to military personnel, why isn’t it unfair to everyone?
I’ve come to call these lenders “predator creditors” because of their focus on impoverished, young, naive individuals. Aside from interest like a rocket, the payments, even on “current” loans, are far out of whack compared to other loans. 
I recently reviewed four loans totaling $2,700 with monthly payments required of more than $400 with nearly $200 in “service fees.” That means that the first $200 goes toward fees, the following $200 to those enormous interest rates, and anything left would be paying down principal.
Although these loans typically draft directly from a checking account, when borrowers realize they’ve bitten off more than they can chew, they often close the account assuming they will evade the lender. As you would imagine, lenders making this type of loan may be more than a little aggressive in collections.
I’m sure there are individuals who have taken these loans, paid them back on time, and not regretted the added expense, but my message here is simple: if you or anyone you know is considering one of these loans, please STOP!  Re-assess, ask the opinion of someone you trust about finances, consider alternative plans, and see this as a sign that your finances are in distress and that you need to effect a change going forward.
One closing thought. Whenever I mention these loans, the first question is always, “Who would take a loan like that?” The answer is people in all sorts of circumstances who believe they’ll only owe for a few days. 
I think the more important question is, “Who would write a loan like this?” 

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