Last week we talked about traditional and non-traditional banking services. Sometimes people have problems with the traditional services provided by credit unions and banks. Then, they tend to seek out non-traditional services which can often be money traps. In some cases, such as with check cashing and money orders, the services are simply more expensive.
Getting checks cashed and writing checks through your own bank or credit union can be much cheaper and often free. But some non-traditional banking services are truly money traps. They charge excessive fees, offer outrageous interest rates, and have strict repayment provisions. Consumers tend to be caught in a downward spiral when using these services and have difficulty digging out of the debt. Here are a few examples:
Payday Loans - These are small short term loans for up to $500 that require a post-dated check for collateral. They can charge a 20% fee, plus a $5 verification fee, and interest up to 36%. So, the cost of these loans is much higher than the average credit card interest rate of around 16%. People often find that they cannot repay the initial loan and are forced to "renew" the loan week after week or month after month, paying additional fees and interest each time.
Car Title Loans - These are short term loans for an amount based on the value of a vehicle that is used for collateral. The loan is usually for far less than the vehicle is worth. The borrower must give the lender the car title and a second set of keys. The interest rate on these loans ranges from 350% to 500%. Not only is the cost extremely high compared to other loans, consumers risk losing their vehicle if they cannot repay the loan.
Pawnshops - These are short term loans based for an amount based on the value of personal property that is used for collateral. The loan is usually for far less than the item is worth. The loan must be repaid with interest in order for the item to be returned to the consumer. If the loan is not repaid, the pawnshop will sell the item. Although this seems like an easy way to get cash, consumers will normally fare better financially by selling the item themselves. They will receive a higher price for the item and avoid paying any interest or fees.
Advance Loan Checks - These checks arrive in the mail notifying consumers that they are "pre-approved" for a loan. All they have to do is cash the enclosed check. But by cashing the check, they are agreeing to the terms of the loan listed in the fine print. These loans often have high fees and interest rates. The fine print may even authorize a lien against the consumer's house.
Rent to Own - Although this is called "renting," this contract is more like a loan because of the interest and fees involved. The stores do not have to tell consumers how much interest they are charging. If payments are late, they can either charge high fees or repossess the property. According to the center for responsible lending, "Under a typical rent-to-own contract, a consumer may pay as much as $2,200 over two years to purchase a $500 TV."
The best way to stay out of these money traps is to learn how to manage money effectively and resolve problems with traditional banking services, instead of "looking for loans in all the wrong places." If you would like to learn more about traditional and non-traditional banking, contact us for information about our Managing Your Money series, which is offered continually in localities throughout the Northern Shenandoah Valley. A new series starts in Winchester on September 1. Call me at 540-459-6140, e-mail me at email@example.com, or call your local office of Virginia Cooperative Extension. You can download a copy of the registration flyer at the following url: http://offices.ext.vt.edu/shenandoah/programs/fcs/Files/Managing_Your_Money_Series_Summer_2011_Flyer.pdf.