Everday, payday loan stores, rent-to-own centers, check cashing stores, pawnshops and tax refund-anticipation, car title and more than three-year car loan lenders are unconsionably taking millions of dollars from the poor and financially illterate, and often pushing them over the edge to financial ruin and bankruptcy.

  • Marketed as short-term bridge loans

  • Typical initial term is 2 weeks -- until next paycheck

  • Typical amount is $300 (median amount is $500)

  • Borrower gives post-dated check to lender to be held until next pay check

  • Typical fee is $15 (up to $30)

  • This is an annualized rate of 130-260%

  • If borrower can't repay (91% can't), typical rollover fee is $50

  • $50 every two weeks equates to an annual interest rate of 433%

  • Payment of rollover fees makes repayment more difficult -- this is the predatory TRAP

  • 90% of loans go past 90-days

  • When rollover fees are added, annualized interest rates average 396-780%, depending on the ultimate term

  • This is greatly in excess of traditional usury rates on consumer loans (25-48%) -- some State legistlatures avoid this by labelling all charges "fees"

  • A typical borrower pays $793 for a $325 loan

  • 15 States have outlawed payday loans

  • 33 States have expressly authorized them

  • Many payday lenders are partnering with national banks to avoid state prohibitions and restrictions

  • An FDIC report concludes that the industry relies on repeat (rollover) borrowers and couldn't make money
    on initial loans because of progressing expenses

  • Payday lenders were labeled "loan sharks" during the great depression (this is the origin of the term)

  • Marketed as "Instant Tax Refund" or "Fast Tax Refund"

  • First offered by professional tax preparers -- now offered by car dealers, furniture retailers and the like

  • Loan fees seem small but equate to annual interest rates in excess of 100%

  • Saves an average of 1 week between e-filed return and direct deposit of refund into taxpayer's bank account.

  • Example Refund = $2000. Fee = $100. RAL saves taxpayer 10 days. Annual interest rate = 183%

  • If other "fees" are factored in, annualized interest rate can increase to as much as 700%

  • According to one report, fees may total as much as $900 for a typical refund of $2,150 although this includes the tax preparation fee

  • RAL's carry very high interest rates for very safe loans -- the IRS e-filing system alerts tax preparers to those most at risk for having their refund withheld.

  • The taxpayer is at risk if the refund is withheld. The refund may be withheld for delinquent child support, student loans and the like.

  • Approximately 12 millino RAL's cost taxpayers more that $1.2 billion in fees annually.

  • Most of these are paid by the poorest Americans (79% by those with annual incomes of $35,000 or less)

  • Many don't have bank accounts, so special use accounts must be established for the direct deposit of the refund, and fees are charged for these accounts as well

  • RAL fees cost working parents who receive "earned income tax credits" $1.57 billion annually

  • Free tax preparation sites are available. For a list call 800-829-1040.

  • Marketed as small emergency loans

  • Typical term is 1 month

  • Typical Loan to Value (LTV) is 55%

  • Car must be paid for and lien free at time of loan

  • Lender takes title and a duplicate set of keys

  • Interest is lower on loans of more than $500

  • Example Loan = $500. Monthly interest = $85. After 12 months, borrower has paid $1,020 and still owes $500. The car has depreciated in value.

  • Loan fees are added. The median fee nationally is $25.

  • In the event of a default, the lender will typically repossess and sell the car. The borrower is then liable for any deficiency. If the lender chooses, it may
    sue to collect on the debt rather than repossessing the car, and it can then tack on collection and legal fees.

  • These loans are made without credit checks or other tests for ability to pay

  • Marketed as a risk-free way to acquire furniture and appliances

  • Because RTO's are not styled as loans, APR's are not disclosed

  • The average imputed APR is 100%, based upon the sales price offered by the RTO stores

  • When department store prices are used, the imputed APR can increase to 200% or more

  • The total cash outlay required to purchase an item from an RTO store is 2-5 times the cash price at a department store

  • Many items are not clearly marked as "new" or "used"

  • The lesson is clear: DON'T RENT TO OWN! Save your money until you can afford to pay cash. At the end of 18 months, you will have your furniture and appliances and much more money.

  • The one good thing about RTO contracts is that the consumer does have the option to cancel the lease and return the goods, and isn't obligated for the purchase price.

Contributions by Hon. John C. Ninfo II and S. Cary Forrester, Esq.

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