Horizons Community Blog (Colville, WA)

By Terri Elders

“Another day older and deeper in debt,” for many signifies a reality of life, not just the lyrics of an old Tennessee Ernie song. As Christmas nears, I just heard on the NBC news that thirteen and a half million people in the United States are still paying off bills from last Christmas. Worse, I learn, more of us shortly will consider borrowing money we’ll never really be able to pay back, to buy Christmas gifts we can’t really afford.

It’s not as if we Americans are intrinsically greedy. It’s just that temptation lurks in our mail boxes in the form of catalogs, on our television with its incessant commercials hawking the latest “in” toys, and, of course, in seductive store window displays in every mall and on every Main Street. It’s tough to say “no.”

Since nobody other than our mothers might be willing to front us an interest-free loan, where do we go if we decide we can’t bear to watch the New Year’s football games on anything other than a new plasma television? The Aspen Institute has identified payday loans, refund anticipation loans and rent-to-own as three predatory lending practices it calls its Nasty Nine.

Payday Loans

The $125 billion a year industry has more retail locations than McDonalds, Burger King, Wal-Mart, Target, Sears and J.C. Penney combined, counting pawnshops, tax refund lenders and rent-to-own stores. But no storefront is needed. Internet and telephone operations avoid state laws and limits, and are accessible in rural areas. Just Google “payday loans” and 1,490,000 results show up. Most sites promise up to $1500 within hours, no credit check necessary.
Payday loans, usually secured by a post-dated check, might seem like a quick solution to a temporary cash shortage, but are a dangerous consumer rip-off. Who uses these services? Payday lenders target younger consumers with a limited understanding of finances, people who are deeply in debt and struggling to meet their basic financial obligations, and those who have a history of using high-risk lenders.

Payday loans are deceptive. Since you're forced to turn over a postdated check, you may be harassed, threatened, or subjected to collection practices. The payday lender may deposit the check before the date you agreed on, causing your check to bounce and forcing you to pay more fees. Because people who use payday lenders are usually in desperate financial situations already, they may have trouble repaying the original loan and they continue to extend it until they've paid more in fees than the amount of their original loan.
The US Federal Trade Commission recommends avoiding payday lenders. Here’s why payday loans make Aspen Institute’s Nasty Nine:

• Typical cost = 650% to 780% APR.
• $500 for two weeks typically costs $$625 to repay.
• Average customer rolls loan over eight times, paying twice the original loan in interest.
• $500 rolled over for one year costs up to $3,900.

Possible Solutions:

• Make changes in your spending plans to avoid overspending.
• Find ways to increase your income.
• Contact a local credit union for a small loan.
• Ask for a pay advance from your employer.
• Consider a loan from family or friends and get the terms of the loan in writing.
• Use a credit card advance.
• Request additional time to pay the bill from your creditors instead of taking a payday loan.
• Seek credit counseling.

Plan ahead to prevent financial emergencies.

Refund Anticipation Loans

On the surface, refund anticipation loans (RALs) might seem like a great deal. Used mostly by low and moderate income consumers, these loans are extremely high-cost bank loans secured by the taxpayer’s expected refund, loans that last a week or two until the actual IRS refund repays the loan.

Even without the costly loan, most taxpayers could have their refund in two weeks or less. RALs are aggressively marketed by income-tax preparation companies. These firms advertise "Instant Refunds" or "Quick Cash" for their customers who need money in a hurry. They disguise the fact that they are selling advance loans on anticipated tax refunds.

People whose income is low enough to qualify for the Earned Income Tax Credit are guaranteed a refund if they file. So tax preparation firms, for a fee, file the taxes and pay out a refund immediately, as a loan secured by the expected IRS check.

Here is why RALs are in the Nasty Nine, according to Aspen Institute. The government finally has found a way to reward people who work hard for less money with a tax credit. And predatory lenders have figured out how to get that money out of workers’ pockets, plus more.

Here’s why they’re in the Nasty Nine:

• 235% APR to get refunds a short time sooner.
• Often coupled with exorbitant tax preparation fees for simple returns.
• Marketed as instant refunds, not loans that must be repaid if the return is rejected.
• Cost poor families $900 million in 20006 plus $90 million in “document processing fees.”
• Target poor rural communities, towns near military bases, Indian reservations, and minority communities.

Possible Solutions:

• Try filing your own taxes, using Internet resources such as About.com: Tax Planning:US
• Use free tax preparation services if you qualify.
• Open a checking or savings account and your refund will be deposited within 10 days, sometimes sooner.

Rent to Own

In this current economic downturn, one industry that’s booming is rent-to-own. Aaron's, the second-largest retailer in the $6.3 billion industry, has announced plans to open 200 stores in 2010, following an 18% increase in same-store sales last year.

Rent-to-own stores provide what looks like an attractive option. Consumers can lease electronics, appliances and other household items by the week or month. Payments can be applied toward a purchase. But critics say the industry has taken advantage of vulnerable customers for years by making rental payments so high that a product's ultimate purchase price is exorbitant. Interest rates and fees can equal 100% to 300%.

Last year, New York’s Sen. Chuck Schumer called rent-to-own companies "one of the most despicable industries around" and cited a typical transaction. Schumer's staff found a 37-inch television offered at Rent-A-Center for 104 weekly rental payments of $31.99 each - a total of $3,326.96. The same model could be purchased outright at Best Buy for $850.

Ed Mierzwinski, consumer program director of the U.S. Public Interest Research Group, though, says rent-to-own should be avoided. “The math just does not add up,” he says. “People should…look and see if in fact they can get a better deal somewhere else.”

This past July Washington State’s Attorney General’s Consumer Protection Division filed claims against Rent-A-Center, asking King County Superior Court to declare its collection practices and rental contracts in violation of the state’s Consumer Protection Act and Lease-Purchase Agreements Act. According to a press release on the AG’s website, this rent-to-own company allegedly had been:

• Harassing consumers with repeated telephone calls at home and at work after being told not to and filling a consumer’s answering service to capacity with collection messages;
• Making repeated collection calls to third parties such as family members or friends of the consumers, and disclosing the existence of the purported debt to third parties, and continuing such calls after being told not to;
• Using profanity and other abusive, threatening or humiliating language, including calling consumers “deadbeat,” “liar,” “thief,” and “ghetto trash”;
• Revealing consumer’s personal information to third parties in the course of attempting to collect debts;
• Using false threats of criminal arrest or other legal action, including telling children who are home alone that their parents will face legal action;
• Pounding aggressively on the doors of consumers’ homes even when the consumer clearly asked them to leave, shouting at consumers from outside of their homes, walking around the house and peering in windows when consumers refused to answer the door;
• Claiming to have a court order to serve when they do not;
• Making payment demands to babysitters or other third parties when the consumer is not in the home; and
• Going to consumers’ place of employment to demand payments and remaining even when asked to leave.

Possible Solutions:

• Comparison shop and use the low cost financing available through appliance and furniture stores.
• Work to improve your credit history to qualify for standard financing.
• Frequent local secondhand stores and charity shops that sell gently used furniture and appliances.

Next week: Sub-Prime Mortgage Loans, Title Loans, and Credit Cards.