Avoiding Dangerous or 'Predatory' Loans

Cash-Advance Loan

A cash advance loan is a small, short-term, high-interest loan that is offered in anticipation of the receipt of a future lump sum of cash or payment.  Although a cash advance may be made in anticipation of future legal winnings, pensions, inheritances, insurance awards, alimony or real estate proceeds, the most common cash advance loans are Payday Loans and Tax Refund Anticipation Loans.

Payday Loan

Payday loans are illegal in New York State.  A payday loan is a relatively small (usually under $500), high interest, short-term loan. A borrower gives a lender a postdated personal check or authorization for automatic withdrawal from a bank account. In return, the borrower gets cash, minus the lender's fees. The lender holds the check or electronic debit authorization for a week or two (usually until the next payday). At that time, the borrower has the option of (1) paying back the loan and fee in exchange for the original check, (2) letting the lender deposit the check, or (3) renewing or ‘rolling over’ the loan.

Some of the problems that can arise with a payday loan are:

• The loan term is short and is often not enough time to save the money needed to repay the loan in full.

• If the loan cannot be paid back in full at the end of the term, it has to be renewed, extended, or more money has to be borrowed to cover the first loan. Fees are charged for each transaction.

• The interest rates that are charged are very high – sometimes 400% or more.

• If the lender deposits the check to repay the loan and there are insufficient funds in the borrower’s account,  the borrower is hit with even more fees for insufficient funds and still owes the mount of the loan to the lender.

If you feel that a payday loan is your only option:

• Shop for the lowest fees and penalties, some credit unions offer payday loans with low fees.

• Borrow only as much as you can afford to repay with your next paycheck.

• Know when your payment is due and be sure to repay the loan on time and in full.

• Try to plan for the future by creating a budget that includes an emergency fund for unexpected expenses.

Tax Refund Anticipation Loans – Some tax return preparers offer what they may call ‘instant’, ‘express’ or ‘fast money’ refunds. These refunds are actually loans borrowed against the amount of your anticipated refund.  These loans often include extremely high interest rates and high fees.  They must be repaid even if you don’t get your refund or it is smaller than anticipated. To avoid the temptation of getting a Refund Anticipation Loan:

• File your tax return electronically and have your refund deposited directly into your bank account.  This will speed up your refund.  Some refunds will be deposited in as few as 10 days.

• If you don’t have a bank account, open one.  All banks in New York State are required to offer low-cost Basic Banking Accounts.  Visit www.banking.state.ny.us/brbba.htm for more information on these accounts.

• Go to a Volunteer Income Tax Assistance (VITA) site at your local library or community center.  For the VITA site near you call 1-800-TAX-1040 or visit www.tax-coalition.org.

• AARP Tax-Aide helps people of low-to-middle income, with special attention to people who are 60 and older, with taxes and refunds.  To locate the nearest AARP Tax-Aide site, call 1-888-227-7669 or visit http://www.aarp.org/money/taxaide/

Advance Fee Loan Scams

These scams involve a company claiming that they can guarantee you a loan if you pay them a processing  fee, an application fee or pay for ‘insurance’ on the loan in advance.  The company will advertise on the Internet, in the classified section of a newspaper or magazine, or in a locally posted flyer.  They will sometimes use a legitimate company’s name or use a variant of a trusted name. They will sometimes ask you to call them at a "900" number, which will result in charges to your phone bill.  They will usually ask to be paid via overnight or courier service or by wire, so that they can’t be traced.   In order to avoid being taken in by this scam you should be aware that:

• It is against the law for anyone to ask you to pay in advance to get you a loan or credit.

• A legitimate lender will never guarantee you a loan or a credit card before you apply, especially if you have bad credit, no credit, or a bankruptcy petition on your credit report.
• These scams should not be confused with pre-qualified offers, which mean you are selected to apply and must go through the normal application process or for pre-approved offers, which require only verbal or written acceptance.
• Don’t ever give out personal information or agree to a loan over the phone or via the Internet.

Government Grant and Loan Scams

This scam, like the advance fee loan scam, uses the internet, phone and newspaper to advertise.  A company claims that they can guarantee a grant or loan from the government in exchange for a fee. Victims are instructed to send money to pay for ‘insurance’ on the promised grant or loan. They will usually ask that the money be sent via overnight or courier services or by wire, so that they don’t leave any trace of their identity or location. They then provide the victim with information that is available in any library or can be ordered directly from the government.

Bounce Protection Programs

With traditional overdraft protection your bank offers a service that allows you to avoid bouncing checks by linking your checking account to your savings account or to a line of credit or credit card that you have with the bank.

Overdraft payment programs, when you do not have traditional overdraft protection are also called ‘courtesy’ overdraft protection or bounce coverage.  The bank pays any checks that you write, debit purchases or ATM withdrawals that are for more money than you have in your account.  The decision to make this payment is at the sole discretion of the bank.  The bank will charge a fee for each transaction and some banks will also charge a daily fee until the account has a positive balance.  Some banks will charge loan fees, sometimes twice in a billing period.  In order to avoid the imposition of additional charges, the customer must repay the bank the amount that it covered plus any accumulated fees.

High Cost Home Equity Loans

Home equity is the value of your home minus the money you still owe on the home.  You can sometimes borrow money from a lender by using the equity in your home as security on a loan.  Home equity lending fraud occurs when someone talks a homeowner into taking out a loan that they don’t need or that is bigger than they need, or has higher interest rates and higher fees and larger monthly payments than they can afford.  If the homeowner falls behind on payments, the lender can take the home.

To avoid Home Equity Lending Fraud

• Don’t give out personal information or agree to a loan over the phone or via the Internet.
• Don’t let anyone who may be working on your home, like a contractor, steer you to a particular lender.
• Don’t borrow more than you can afford. Educate yourself.  Know what the prevailing interest rates are. Remember that a low monthly payment isn't always a deal. Look at the TOTAL cost of the loan.
• Learn the real value of your home by getting an independent appraisal.
• Don't trust ads promising "No Credit? No Problem!" If it sounds too good to be true, it probably is.
• Get your credit report and your credit score. See if you qualify for better rates than are being offered.
• Never lie about your income, expenses or available cash to get a loan and avoid any broker or lender that encourages you to do so.
• Avoid early repayment penalties and fees of more than 3% of the loan amount (4% for FHA or VA loans).
• Be aware that credit insurance premiums (insurance that a borrower pays a lender) should never be financed into the loan up-front in a lump-sum payment.
• Don’t ever sign a document that has blank spaces or pages in it that the lender promises to fill out later.
• Ignore high-pressure sales tactics.  Take your time and read everything thoroughly.
• Be wary of a lender that promises to refinance the loan to a better rate in the future.  A predatory lender will let you keep refinancing a bad loan and will charge fees every time.
• Know that even if you have already signed the agreement you have three days to cancel it.
• Take your documents to a housing counselor near you and have them review the documents or refer you to someone who will.  To find a counselor near you, visit the Department of Housing & Urban Development at  www.hud.gov/offices/hsg/sfh/hcc/hcc_home.cfm or call (800) 569-4287.  

Auto Title Loans – These are small, high-interest loans given using a car as collateral. If you default on the loan, you lose your car.

Rent-to-Own – When you rent furniture or appliances you will often end up paying much more than it would have cost you to buy that furniture all at once.  If you miss a payment the company may repossess the items and you will forfeit any payments you may have already made.

Don’t deal with unlicensed lenders.  To make sure a lender is licensed by the State of New York, or to see if a lender has any complaints filed against them, call the Banking Department at 1-877-BANK-NYS or visit www.banking.state.ny.us/silicend.htm