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Dangers of applying for an online payday loan

As consumers move their financial activities online, applying online for a payday loan may seem like the natural thing for a cash-strapped person to do.

But you could be setting yourself up for a world of hurt, from paying exorbitant interest rates to having funds swiped from your bank account to being threatened by debt collectors. Just filling out an application could be enough to begin the harassment and thievery.

“Absolutely the worst thing you can do is apply for an online payday loan,” says Jay Speer, executive director of the Virginia Poverty Law Center.

Most online payday loan sites aren’t even operated by lenders. They’re run by “lead generators,” who seek your personal information, such as Social Security number, driver’s license number and bank account details. They then sell that information to lenders.

“Your email and telephone explode after that,” Speer says, as lenders vie to offer you cash. That can happen even if you live in one of the 15 states where payday loans are illegal.

Lenders aren’t the only ones in the market for your personal information. “There’s a good chance they sell to fraudsters — people who come after you months or years later,” he says.

Sandra Green (not her real name) has experienced this firsthand. The Virginia woman turned to online payday loans after her husband was injured and couldn’t work for two years. Their credit was damaged and they couldn’t get cash to pay their bills from traditional financial institutions.

Green took out several loans totaling $3,000 to $4,000 starting around 2010. The lenders that she received cash from took their payments from her bank account — but they weren’t the only ones. A company she had never heard of swiped money from her account, creating an overdraft.

She filled out a request for the bank to stop payment. That worked for about six months, and then the withdrawals started again. “People will change the identity of the company and then they’ll hit it (the account) again. Once they do this it’s a never-ending cycle,” she says.

Companies she’d never done business with would call her at work and at home, harassing her. One threatened to file papers with the local sheriff’s office if she didn’t pay immediately.

“They get really belligerent when you don’t do what they want you to do,” Green recalls.

She feared she’d wind up in bankruptcy because of the loans and finally sought help from Blue Ridge Legal Services, a Virginia legal aid society, in 2013. Blue Ridge connected her with the Virginia Poverty Law Center.

Speer says of online payday lenders: “These people are like sharks. If you give them some money it’s like throwing blood in the water.”

Payday loans are generally described as small, short-term loans. A consumer writes a check for the amount borrowed, plus a fee. The lender advances money against the check and the check is held until the next payday, when the loan and fees must be paid. Or, in the practice used by most online lenders, a consumer can grant the lender access to his bank account, and the lender electronically accesses the account to deposit money and withdraw payment.

Even paying back legitimate loans carries astronomical costs. Green took out a loan of $350. It took six weeks for her to pay it back, and she paid nearly $300 in fees.

Online payday loans boom
Her experiences are not uncommon. “Fraud and Abuse Online: Harmful Practices in Internet Payday Lending,” a 2014 study by the Pew Charitable Trusts, found online installment payday loans typically have an APR of 300 percent to more than 700 percent. Online lump-sum payday loans have a typical APR of 650 percent, or $25 per $100 borrowed per pay period. Exorbitant fees are also charged, and initial payments might not be applied to the loan’s principal.

Online payday lending is big business. Revenue tripled from $1.4 billion in 2006 to $4.1 billion, according to Pew.

Of the more than 250 online payday borrowers surveyed by Pew, almost 40 percent said their personal information was sold to a third party without their knowledge. Nearly one-third had an unauthorized withdrawal from their account.

Threats were common, with 30 percent of those surveyed saying they were threatened by an online lender or debt collector.

“Harassment and fraud are really concentrated in the online lending market,” says Nick Bourke, project director for Pew’s study on payday loans.

Part of the problem stems from the fact that there’s no control over who can get your information once you apply for an online payday loan. “People’s personal information can be spread far and wide,” Bourke says.

Even if the loans are fraudulent, a consumer’s failure to pay them may be reported to one of the three main credit bureaus, Speer says, which can impact a consumer’s ability to rent an apartment or land a job.

Many storefront payday lenders are fed up with the behavior of these online payday lenders.

“These unlawful lenders roam the Internet trolling for customers. They are scammers. They are fraudsters,” says Amy Cantu, spokeswoman for the Community Financial Services Association of America, which represents more than half of the country’s storefront payday lenders.

Though online payday lenders represent just one-third of the marketplace, 90 percent of payday lending complaints filed with the Better Business Bureau are aimed at them, according to Pew.

Self-regulation efforts
Association members vow to adhere to the organization’s best practices, which include complying with state and federal laws, being licensed in each state in which they do business and adhering to acceptable debt collection practices.

Some of the association’s larger members also have an online presence, she says, but those sites also adhere to the organization’s best practices.

Cantu says she understands that consumers with financial troubles may prefer the anonymity of the Internet when seeking cash, rather than walking into a storefront payday lender. But online lenders are supposed to only operate in the states that allow payday lending.

Her organization wants the federal consumer watchdog agency, the Consumer Financial Protection Bureau, to crack down on illegal lenders.

Agencies crack down
Already the CFPB and the Federal Trade Commission are stepping up action against fraudsters. In a joint news conference in September, the agencies announced they’d filed suit against two online payday lenders.

The CFPB sued Kansas City-based Hydra Group, while the FTC sued CWB Services, also based in Kansas City.

The CFPB received more than 1,300 consumer complaints about the Hydra Group.

At the news conference, CFBP Director Richard Cordray accused the Hydra Group of “running an illegal cash-grab scam to force purported loans on people without their prior consent. It is an incredibly brazen and deceptive scheme.”

Both the Hydra Group and CWB Services were accused of buying personal information, including bank account numbers, from lead generators. The companies would deposit money into consumers’ bank accounts without any signed agreements, and then make unauthorized withdrawals from the accounts. If a consumer complained, the companies would produce false loan documents.

In 15 months, the Hydra Group made $97.3 million in loans and collected $115.4 million from consumers.

Even if consumers closed their accounts, their information might have been sold to debt collectors, who then attempted to collect more money.

A federal judge temporarily shut down the Hydra Group, freezing its assets. The CFPB is requesting a permanent shutdown, along with penalties imposed upon the company and refunds made to consumers.

With CWB Services, the federal court froze the company’s assets and appointed a receivership and the FTC is requesting consumers’ money be refunded. The company had raked in $46 million in 11 months, said Jessica Rich, the FTC’s director of the Bureau of Consumer Protection.

Bourke says the CFPB should ensure that small loans are tailored to the borrower’s ability to pay them off and should provide more protection to consumers, particularly against illegal debt collection practices.

“The core of the problem is that payday loans don’t help people. They drive people further into debt and distress,” he says.

See related:Know your credit card fraudster

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Know your rights under the Truth in Lending Act

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New protections from financial ‘gotchas’ in 2015Dangers of applying for an online payday loanCFPB orders refunds for 98,000 subprime cardholdersFighting back against the growing threat of tax fraudFinanceLoanspayday loanbank account […]

7 Ways to Build Your Credit Score Without a Credit Card

Unless you have a ton of cash at your disposal, you’ll probably need credit at some point in your life. Whether you’re buying a home, car or big-ticket luxury item, the first thing that most lenders typically look at is your credit score.

If you have limited or no credit history, you’ll need to begin building your credit and boost your score before you apply for a major loan. Unfortunately, many believe that opening and using a credit card is the only way to go.

Here are a few alternatives to help raise your credit scores without the magic plastic:

1. Ask companies to report on your behalf

Do you have any recurring bills that you pay on a monthly basis, such as rent, utilities, cable or a cellphone? Try giving the providers a call and request that they report your account activity to the three major credit bureaus, TransUnion, Experian and Equifax.

Do this only if you have responsible payment habits, as payment history accounts for 35 percent of your credit scores and can have a significant impact if there is not a lot of other data in your credit reports.

Also, bear in mind that these companies are not obligated to report to the bureaus, and your request is simply a favor that they have the right to deny.

2. Become an authorized user on another credit card

Of course, there are pros and cons to becoming an authorized user. If the cardholder has a strong credit background, two thumbs up for you because signing on as an authorized user will enable their stellar behavior to improve your credit profile somewhat (perhaps not as much as you think). But, if things are the other way around, your credit scores could take a hit.

Either way, if you opt in and have a change of heart, the information will quickly vanish from your credit file when you request to be removed from the account.

3. Open an account with a credit union and take out a small personal loan

Some credit unions have restricted membership and limited accessibility, but credit unions generally offer financing options at lower interest rates than traditional banks. To give your credit score a boost, apply for a small personal loan.

If your request is denied, inquire about a secured loan in which your money, say, a certificate of deposit or savings account, will be used as collateral. The request will more than likely be approved because the risk to the institution is minimal. And you may have to pay a tad bit of interest, but the rate usually beats what’s available in the credit card world.

4. Apply for an installment loan

Installment loans paid in a timely manner over an extended period of time build your credit scores because they show creditors that you are a responsible borrower. The types of credit in your file make up only 10 percent of your score, but the impact has the potential to be greater if the information in your credit reports is limited.

Retailers sometimes offer promotional installment loans to customers with little to no introductory interest for a limited period of time. If you have the cash on hand, it may not be a bad idea to take this route. But be sure that you have the total sum of cash available upfront to make timely payments and eliminate the balance before the interest kicks in.

5. If you’re a student, take out a federal student loan

A credit check is not required to obtain a federal student loan. All you need to do is fill out the Free Application for Federal Student Aid (FAFSA), and you’re all set. Since it is an installment loan, it can help boost your credit score.

But don’t get the loan and blow through the money. Instead, aim for one that is subsidized and deposit the money into a safe interest-bearing account so the funds will be available when repayment starts.

6. Research peer-to-peer loans

Companies such as Prosper and Lending Club offer peer-to-peer loans in an environment where borrowers are connected with individual investors. The interest rates are usually lower than those of traditional financial institutions. And the lenders are eager to loan unsecured funds because the return they derive is competitive with other investments. (See “4 Things to Know About Peer Lending.”)

Most of the peer-to-peer lenders report to the major credit bureaus.

7. Try an alternative credit score

By reporting your payment history to an alternative to the big three credit bureaus, you can create a nontraditional credit score. Check out a service like Payment Reporting Builds Credit, known as PRBC, to learn more about how an alternative credit score service works.

Do you know of any other ways to improve your credit score without using a credit card? Feel free to share it in the comments below or on our Facebook page.

For more tips on raising your score, watch this video by finance expert Stacy Johnson:

Watch the video of ‘7 Ways to Build Your Credit Score Without a Credit Card’ on MoneyTalksNews.com.

This article was originally published on MoneyTalksNews.com as ‘7 Ways to Build Your Credit Score Without a Credit Card’.

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Have an unpaid loan with SSS? Read this

MANILA, Philippines – The Social Security System (SSS) is offering options for members who have failed to pay their loans.

The SSS said members with outstanding loans under the Stock Investment Loan Program (SILP) and the Privatization Fund Loan Program (PFLP) can avail of an option to sell their shares of stocks under the two programs.

“Despite loan condonation programs that we have offered in the past, there are still quite a number of SSS members who have let their unpaid SILP and PFLP loans balloon into staggering amounts due to penalties and interest,” said SSS Senior Vice President and concurrent Officer-In-Charge for Lending and Asset Management May Catherine Ciriaco.

The SSS said as of 31 December 2014, there are 3,037 delinquent SILP loan accounts with a total of P304.44 million, inclusive of penalties and interest.

There are also 5,755 delinquent PFLP loan accounts, reaching P304.19 million with penalties and interest.

In September 2014, the Social Security Commission approved the option to sell shares of stocks, as a way to lessen these delinquent accounts.

Under the option to sell shares, the member-borrower will execute a Special Power of Attorney authorizing the SSS to sell his shares of stocks at the prevailing market price, based on the quotation of an accredited broker and subject to the usual broker’s commission, taxes and other fees.

The net proceeds from the sale of the shares of stocks will then be applied to the member’s outstanding SILP or PFLP loan balance.

“Any excess amount after application to the outstanding SILP/PFLP loan balance will be applied to his delinquent salary or housing loan, if any… If none, or if there is still excess amount, then this will be refunded to the member-borrower,” Ciriaco said.

However, if the net proceeds from the sale of the member-borrower’s shares of stock are not sufficient to cover the outstanding SILP or PFLP loan balance, then the member shall be required to pay the remaining amount either in cash, from a salary loan renewal, or from the final benefits (total disability, retirement, and death). However, the remaining balance will continue to be charged with interest and penalties until fully paid.

“While this is not the condonation program that members are waiting for, the option to sell program is the next best way for members to finally pay off their outstanding loans under the SILP and PFLP to ensure that they fully enjoy their SSS benefits without deductions,” Ciriaco said.

Members interested to apply for the option to sell shares program can contact Teresita Badiola or Ma. Divina Cadorna at the SILP Section of the SSS Member Loans Department, 11/F of the SSS Main Office, or call 435-9862 and 920-6401 locals 5887 and 5915 for further details.?

[…]

Loan sharks could take advantage of payday lending caps, according to CAB


Loan sharks could take advantage of payday lending caps, according to CAB

DEBT ADVICE: Darlington Citizens Advice Bureau’s Dawn Gill and Neeraj Sharma

First published in News by Joanna Morris

LOAN sharks could cash in following caps on payday lending, according to the Citizens’ Advice Bureau.

Caps limiting the interest rate and fees instated by so-called payday lenders have been introduced by the Financial Conduct Authority in a bid to protect people struggling with debt.

As of Friday, January 2, companies such as Wonga – who previously had annual interest rates higher than 5,000 per cent – must comply with regulations that will see interest and fees capped at 0.8 per cent per day.

Under the new rules, the total cost of a loan will be limited to 100 per cent of the original sum and default fees will be capped at £15.

While the move has been welcomed by the Darlington Citizens Advice Bureau (CAB), the organisation has warned the changes may cause more vulnerable people to fall prey to loan sharks.

Darlington CAB’s Dawn Gill expressed fears that loan sharks could take advantage of those now unable to access as much money as they need.

She said: “Caps are a good thing but clients will still want money from somewhere – they’re being protected from high interest rates but companies may not lend as much.

“They may not be able to get as much as they were expecting or anything at all.

“If they don’t get what they want, they are in danger of reaching out to someone like a loan shark instead of coming to us, for example.

“We haven’t seen it happen yet but the changes are still new and it’s a worry.”

Ms Gill urged payday lenders to work with CABs in order to help their clients manage their finances.

She said: “The ideal situation would be for payday lenders to refer their clients to us before they take out a loan at all and let us help them to maximise and manage their income.

“I’d advise people to come to us and let us help them find ways to manage.

“We can help with benefits, cutting energy bills or working out incomings and outgoings and priorities.

“There are a lot of people prioritising paying back intimidating people who knocked at their door with money rather than paying their rent or council tax but they could end up losing their home.”

To anonymously report a loan shark, contact the Illegal Money Lending Team by emailing reportaloanshark@stoploansharks.gov.uk or calling 0300-555-2222.

[…]

Choosing a Lender? Watch Out for These Costly Traps.

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Small-business owners seeking financing have hundreds of options thanks to a proliferation of lending firms and programs offering fast and easy solutions. But the reality is only a few of these choices will be the right fit for your nascent business. Although the lure of quick cash regardless of personal credit can be tempting, be wary of common traps when considering a lender for your company:

1. Know when business credit services are necessary — and when they absolutely are not. While business credit can be important as your businesses matures, it doesn’t make a difference for a startup applying for a loan. Startups are not expected to have a strong business credit file, so any firm extolling the necessity of business credit services to apply for a loan may actually be doing you a disservice.

Instead, concentrate on the strength of your personal credit, as lenders will focus on this more because you will ultimately be responsible for paying back the loan.

2. Know the price you pay for speed and convenience. Some short-term lenders and cash advance companies offer so-called “fast” loans with quick application processes and a lax review of personal credit. This speed and convenience comes at a cost, however. Entrepreneurs should be careful when considering a cash advance, especially if rates and pay off timeframes are extremely harsh. Some firms offer annualized percentage rates as high as 200 percent with amortizations as slow as three to four months — terms like these can be a nail in the coffin before a business is even birthed.

Protect your business by reading all terms carefully and make sure you have a clear plan to pay back the loan before signing on the dotted line for a cash advance.

Related: The Small-Business Guide to Getting the Cash You Need

3. Don’t outsource; know your own business plan. Be wary of any company insisting that you need a business plan and financial forecast in order to sell you an expensive business plan package. Additionally, if you’re paying someone else to do this work for you, then your business may have bigger problems. Having a direct hand in developing the business plan and financial projections ensures that you as the business owner know the ins and outs of the company and have defined goals for growth.

Have a good understanding of what makes your business tick in the present, and where it is realistically headed in the future to protect it from other unnecessary expenditures that you may encounter throughout the startup journey.

Visit: Entrepreneur Bank Search — A search tool to help you discover local banks.

Finance […]

Pay Attention to Payday Loan Terms

Many cash-strapped consumers may find themselves in need of a small loan to pay off their holiday purchases. While payday lenders may seem like an easy way to get cash fast, for many, it ends up being a burden. BBB encourages consumers to pay close attention – many payday lenders charge high interest rates, set unaffordable payment terms and use high-pressure collection tactics – making these debts impossible to pay off.

Payday loans are small loans subject to state regulation. In the US, thirteen (13) states have banned payday lending and several others have restrictions on the interest rate or associated fees. Traditionally, states cap small loan rates and require installment repayment schedules be given to borrowers, according to the Consumer Federation of America.

Texas is one of few states that does not have any statewide regulations on payday loans. Individual cities have enacted their own ordinances to keep interest rates down for consumers.

“Some payday lenders target people whose credit may not be good enough to obtain a credit card or bank loan and who therefore rely on advance short-term loans to get by”, said Mechele Agbayani Mills, President and CEO of BBB Serving Central East Texas. “Often, people take these loans in desperate circumstances without realizing these high interest rates come with fees and may trap them in a cycle of debt.”

Before you borrow, your BBB offers the following advice:

Start with trust. Check out a lender’s BBB Business Review to see its rating, history of complaints, ad-related issues and consumer reviews.

Consider another loan source. Consider banks and credit unions who offer short-term loans for small amounts at competitive rates. A cash advance on a credit card also may be possible, but it may have a higher interest rate than other sources of funds. In any case, weigh all your options first and compare all available offers.

Never pay an upfront fee. Some short-term lenders ask for a post-dated check to cover the amount you borrowed, plus interest and fees. However, if any lender asks for those fees in cash before giving you any money, walk away. Charging undisclosed upfront fees is illegal according to the Federal Truth in Lending Act (TILA).

Limit the amount you borrow. Only borrow what you know you can pay off with your first paycheck. If you allow your balance to roll over for several weeks or months, the company may tack on fees each time which can result in you owing several times more than what you borrowed in the first place.

Read the fine print. Pay close attention to fees and consequences of nonpayment. According to TILA, lenders must disclose the cost of the loan. Payday lenders must give you the finance charge (a dollar amount) and the annual percentage rate in writing before you sign for the loan.

Keep your documentation. Protect yourself by having documentation that all loans were paid in full, as there may be attempts by scammers to collect a debt that is not owed.

For more tips on how to be a savvy consumer, go to bbb.org. To report fraudulent activity or unscrupulous business practices, please call the BBB Hotline: (903) 581-5888, and remember to Look for the Seal.

[…]

The year in business: Payday loan debate heats up in Baton Rouge …

Lobbyists for the payday loan industry stormed Baton Rouge over the summer as state lawmakers deliberated tighter controls on short-term, high-interest loans.

Proponents for stricter rules argued payday loans prey on the working class and trap them in a cycle of debt that can ruin their credit.

But payday lenders said restrictions would put them out of business and stymie a much-needed source of lending for the poor.

By the end of the 2014 legislative session, the payday loan industry had beaten back several proposals to limits its activity. But the fight isn’t over.

What happened: The Legislature considered several proposals putting limits on payday loans during the 2014 session.

Initial bills, sponsored by Rep. Ted James, D – Baton Rouge and Sen. Ben Nevers, D – Bogalusa, proposed capping payday loan interest rates at 36 percent annually.

A later draft abandoned the 36 percent cap and instead proposed limiting borrowers to 10 payday loans per year. It also required payday lenders to enter transaction into a database reviewed by the Office of Financial Institutions.

The bill failed on the Senate floor in late April, despite the support of consumer advocates, including AARP Louisiana and Louisiana Together, a statewide network of religious and civic organizations.

Senators who voted against the bill were wary of placing limits on lending, which they said could damage the industry and hurt consumers.

What’s next: AARP Louisiana, Louisiana Together and other groups that led the initial charge for limits have vowed to continue their push in the 2015 session.

Payday lenders are likely to face heightened scrutiny in coming years, even if Louisiana rules do not change.

Federal regulators have already cracked down on banks that offer short-term products.

In July, the Consumer Financial Protection Bureau reached a $10 million settlement with payday lender ACE Cash Express over illegal debt collection tactics. The agency, which became the first to oversee payday loans in 2012, is in the process of drafting rules for the entire industry.

In the meantime, traditional lenders, including Liberty Bank & Trust in New Orleans, are experimenting with ways to offer small loans and other products tailored for low-income borrowers.

[…]

Can You Use Your Car to Get a Loan?

Dozens of options exist for consumers looking to borrow money, but some loans are much harder to access than others. The best and least expensive ways of borrowing money generally require the borrower to have a good credit history, and many people aren’t in that situation.

That’s where things like payday loans and auto title loans come in, some people say — that’s a controversial viewpoint, which I’ll explain later.

First, it’s important to go over the details of what auto title loans are.

What Is an Auto Title Loan?

In 21 states, if you own a car, you can probably get an auto title loan. (There are some auto title lenders who allow consumers to borrow against a vehicle if they have a certain percentage of equity, but those are uncommon.) You take your vehicle to an auto title lender — generally a storefront business — where the lender determines the value of the vehicle and offers you a loan for a certain percentage of that car’s value.

You give the lender the title as collateral for the loan, giving the lender the ability to repossess your car if you do not repay the loan. The average loan is $951 and is due in full, plus fees and interest, in 30 days, according to a report from the Center for Responsible Lending. Fees generally run $25 per $100 borrowed, so that’s $237.75 for the average $951 loan (plus interest).

Interest rates average 25% per month, or 300% APR. Eighteen of the 21 states with auto title lenders allow triple-digit APRs (Arizona, New Hampshire and Georgia do not). Those 21 states are Alabama, Arizona, California, Delaware, Georgia, Kansas, Louisiana, Idaho, Illinois, Mississippi, Missouri, Nevada, New Hampshire, New Mexico, South Carolina, South Dakota, Tennessee, Texas, Utah, Virginia and Wisconsin.

Borrowers may refinance (for a fee) their loans at the end of their 30-day loan period if they cannot afford the balance.

That’s the gist of it. Theoretically, it’s a simple process: Bring your car to the store with your driver’s license, vehicle title, spare key and possibly a recent paycheck stub. The lender determines the car’s wholesale value, lends you a portion of that value in cash, and you make an appointment to return in 30 days to repay the loan.

In reality, the process gets much more complicated from there.

Why Auto Title Loans Are Controversial

Some people think auto title loans are a useful tool, while others condemn the practice as predatory lending.

Tony Petkovich, head of global trading at PCM Capital Management, invests in auto title lenders and thinks the products serve a purpose for people who can’t get other types of loans and don’t have credit cards. He sees it as a valuable option for business owners or consumers who find themselves in a pinch and have no other ways of getting cash they need as soon as possible.

“The bottom line is this if you’re short on money, … and somebody tells you, ‘Look we’re going to let you make the deal happen, but we’re going to charge you a 35% interest rate,’ the bottom line you’re going to look at the benefit to you — you’re not going to care how much it costs,” Petkovich said. He’s referring to a 35% monthly interest rate, by the way.

That’s the thing: If you’re taking out an auto title loan in an emergency, you will pay for it. Even if you make the balloon payment at the end of 30 days, you’re looking at paying hundreds of dollars in fees and interest, in addition to the principal balance.

This is where things get pretty ugly in auto title lending: Most people don’t repay the loan within 30 days, and the cost of that initial loan skyrockets. The average car title loan borrower renews the loan eight times, so for the $951 average loan, that’s an extra $1,904 in total renewal fees and $2,142 in interest. This average person pays $3,093 to borrow $951, according to the Center for Responsible Lending’s 2013 report on the industry. The report is based on state-level data and bankruptcy court proceedings involving auto title loans.

“The normal customer who gets a car title loan ends up trapped in that loan,” said Chris Kukla, senior vice president of the Center for Responsible Lending. He said the typical outcome from these loans negates arguments for their existence.

“That’s always the comment they make is, ‘Where else are they going to go?'” Kukla said, referencing business owners and industry advocates. “It doesn’t justify a problem that traps people in debt. Is the credit they’re getting doing them any favors? Is it really helping them, or is it just creating another financial emergency? And what’s clear is car title loans create a financial emergency.”

If these sound a lot like the problems people highlight with payday lending, that’s because they are. Using the car as collateral sets these products apart (payday loans are also available in all 50 states). If you’re taking out an auto title loan, chances are your credit is already in bad shape, and defaulting on one of these loans will trash it further. (You can get your credit scores for free every month on Credit.com to see where you stand.) On top of that, you will lose your car and the lender will sell it. Should the proceeds of that sale not cover the amount you owe in principal, interest and fees, the lender could send a debt collector after you — that’s another hit to your battered credit. Add that to the fact that you’ve lost your car and quite possibly your only way of getting to work, the worst-case scenario of taking out an auto title loan is pretty horrifying.

Auto Title Loan Alternatives

There are many more reasons why you should not get an auto title loan than why you should. Still, that doesn’t necessarily help someone who desperately needs money and sees an auto title loan as the only viable option.

“Don’t. Just don’t,” Kukla said he would say to anyone considering an auto title loan. “There are going to be other options available, and some of them may not be as easy to do, but these lenders are going to try and promise that this is going to be a short-term loan, but everything we know is people walk in the door and end up trapped in worse situations. … Try every other option you have. Even if it (an auto title loan) is an option, it’s an option that’s going to destroy you. It’s not going to be a help.”

If you own your car, Kukla said you can try your local credit union for a product that is similar to an auto title loan in name only: Based on the value of your car, the credit union may lend you a percentage of that car’s value, but it’s more like taking out a new auto loan on your car, with installment payments and a lower interest rate.

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Should you give strangers your money on LendingClub?

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Websites that play matchmaker for people who want to borrow money and those who have spare cash to lend, offer investors an enticing deal: Sweet returns and the chance to hand-pick who you trust to pay you back.

And returns that can reach higher than 10% sound attractive at a time when interest rates on traditional savings accounts are meager. But investors should know that high returns — even in an online marketplace where overhead costs of lending are lower — imply higher risk.

LendingClub Corp. LC, +5.38% , an online loan company that has facilitated more than $6.2 billion in loans since 2007, went public Thursday. Its shares jumped from an initial public offering price of $15 a share to $24.75 at opening. Borrowers can apply to match up with lenders for personal loans for up to $35,000 or business loans capped at $300,000. The company rates borrowers with grades A through G, and says the average borrower has a FICO score of 699. The lower the grade, the more interest the borrower pays.

Online marketplace lending, through companies like LendingClub and its competitor Prosper, is expected to grow into a $1 trillion industry by 2025, according to the San Francisco-based venture capital firm Foundation Capital.

LendingClub borrowers can apply for credit through the company for various reasons: to help pay down credit card debt by taking out a loan with a lower interest rate, to pay medical bills, finance a car, purchase inventory for a business or even fund a vacation. The company says the average default rate has remained between 2% to 4% since 2009, higher than the average annual default rate of 1.06% for U.S. consumers, according to the S&P/Experian Consumer Credit Default Indices.

“No individual is going to be able to become adept at evaluating risk from borrowers on this type of loan,” says William Jordan, president of William Jordan Investments, a wealth management firm based in southern Orange County, Calif. For example, does a borrower who needs to pay off medical bills have a condition that could exacerbate and create more health-related expenses, affecting his or her ability to repay the loan? And can you trust someone who is borrowing money just to fund a vacation to be responsible enough to pay off your loan?

LendingClub requires investors to put a minimum of $25 in each fund they select. The company’s chief executive and founder Renaud Laplanche says that threshold encourages lower-risk investors to diversify their investments across different borrowers.

“While it’s illiquid, it’s also pretty short-term and high cash-flow,” Laplanche says. And if a borrower is diligent, “you also get paid every month.”

People who opt to assume the risk of lending to strangers should follow a few rules, says Peter Renton, who runs the website LendAcademy.com, where he writes about how to navigate peer-to-peer lending. An investor who puts $5,000 into peer-to-peer loans should spread the money out as widely as possible, given the $25 baseline. Also, put money in the best-rated funds if you can’t stand the thought of a stranger burning cash you’ll never see again, he says. And know that when a loan is 150 days past due and there’s no reasonable expectation of repayment, LendingClub says it may sell it to a third-party collection agency in an attempt to collect remaining payments, though recoveries are “infrequent,” according to the company’s website.

Chuck Jaffe’s Lump of Coal awards

(3:18)

Marketwatch’s Chuck Jaffe hands out his annual Lump of Coal awards. Is your favorite fund manager on the list?

About 70% of LendingClub investors are individuals, and the remaining 30% are institutional (for example, hedge funds, endowments and wealth management firms). For individual investors getting started, Jordan, the wealth manager, says even a portfolio that includes several types of peer-to-peer loans still amounts to an “unsecured consumer loan.”

“Someone coming to LendingClub with $1,000 or $5,000 or $10,000, I would say they should not be investing on a platform such as LendingClub,” he says. “They’re probably a newer investor. They don’t have that much experience. They certainly don’t have that much money.”

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New Mexico urged to limit ‘payday’ loan rates

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MARTIN: Encouraged by some developments

One of the worst things a person without the financial wherewithal to repay a loan can do is take out a so-called “payday” or “storefront” loan to buy Christmas gifts.

But, with the holidays here, and because it is so easy to get such loans, that’s exactly what many low-income people are likely to do. Predatory lenders encourage the practice.

That’s the message University of New Mexico law professor Nathalie Martin hopes to get out to would-be borrowers. She would also like to see interest rates capped statewide at 36 percent.

“I think it’s getting a little more likely that the state Legislature will act,” she said.

Martin – and others – are encouraged by a number of developments:

In 2007, with broad bipartisan support, President Bush signed the Military Lending Act, placing a 36 percent limit on interest rates on loans to armed forces personnel. In September, with lenders seeking to circumvent the MLA, the Defense Department proposed new and stronger regulations to shore up the law. The cities of Albuquerque, Santa Fe, Alamogordo and Las Cruces, and Doña Ana County – and the New Mexico Municipal League and Association of Counties – have adopted resolutions supporting a 36 percent annual percentage rate cap. Eighteen states have imposed interest rate limits of 36 percent or lower, most of them in recent years. In Georgia, it is now a crime to charge exorbitant interest on loans to people without the means to pay them back. In 2007, New Mexico enacted a law capping interest rates on “payday” loans at 400 percent. Many of the lenders quickly changed the loan descriptions from “payday” to “installment,” “title” or “signature” to get around the law.

But this past summer, the New Mexico Supreme Court, citing studies by Martin, held that “signature” loans issued by B&B Investment Group were “unconscionable.” B&B’s interest rates were 1,000 percent or higher.

High-interest lenders argue that they provide a much-needed source of funds for people who would not ordinarily qualify for loans, even those who are truly in need. One lender, Cash Store, in an ad typical for the industry promises borrowers that they can get “cash in hand in as little as 20 minutes during our regular business hours – no waiting overnight for the money you need” and boasts a loan approval rate of over 90 percent. It also offers “competitive terms and NO credit required. Be treated with respect by friendly store associates. Installment loans are a fast, easy way to get up to $2,500.”

Pushing a cap

Martin teaches commercial and consumer law. She also works in the law school’s “live clinic,” where she first came into contact with those she calls “real-life clients,” people who had fallen into the trap of payday loans.

“I would never have thought in my wildest dreams that this was legal, interest rates of 500 percent, 1,000 percent or even higher,” she said.

Martin is not alone in fighting sky-high interest rates and supporting a 36 percent cap.

Assistant Attorney General Karen Meyers of the Consumer Protection Division noted that it wasn’t simply interest rates that the Supreme Court unanimously objected to as procedurally unconscionable in New Mexico v. B&B Investment Group.

The court also addressed the way the loans were marketed and the fact that B&B “aggressively pursued borrowers to get them to increase the principal of their loans,” all of which constitutes a violation of law.

In another lawsuit from 2012, New Mexico v. FastBucks, the judge found the loans to be “Unfair or deceptive trade practices and unconscionable trade practices (which) are unlawful.”

Long legal road

Both the B&B and Fastbucks cases were filed in 2009 and ultimately went to trial. The time period indicates the commitment of the Attorney General’s Office and how long it takes a case to wend its way through the legal system.

Each of the cases dealt with one business entity, although they often do business under several names. B&B, for example, an Illinois company, operated as Cash Loans Now and American Cash Loans.

According to the president of B&B, James Bartlett, the company came to New Mexico to do business because “there was no usury cap” here.

Early this year, a survey by Public Policy Polling found that 86 percent of New Mexicans support capping interest at an annual rate of 36 percent. Many people think that is too high.

Meyers said predatory lending profits depend on repeat loans. Analysts estimate that the business only becomes profitable when customers have rolled over their loans four or five times.

‘Really heartbreaking’

“We have interviewed a lot of consumers,” she said. “It’s really heartbreaking.”

Steve Fischman, a former state senator and chairman of the New Mexico Fair Lending Coalition, said three-fourths of short-term borrowers in the state roll over loans into new loans, which is precisely what predatory lenders want.

“New Mexico is one of the worst states when it comes to such loans, because we have the weakest law,” he said.

The coalition is working with lawmakers to draft a bill that would impose the 36 percent cap. It is likely to come up in the next session. But the chances of passage, despite popular sentiment, are unknown.

The Legislature has failed to act in the past, Fischman said, largely because of the many paid lobbyists – including former lawmakers – working for the lenders. He described the Roundhouse back-slapping as “bipartisan corruption.”

The National Institute on Money in State Politics, a nonpartisan national archive of such donations, reports that, thus far this year, payday lenders have made 122 contributions totalling $97,630 to state lawmakers.

Opponents of storefront loans say one way some lenders entice the poor into taking out loans is to cajole them with smiles and misinformation. Loan offices – often in lower-income neighborhoods – often become places for people to hang out and socialize. Agents behind the loan office desks pass themselves off as friends.

But, Fischman said, “A lot of people thought Bernie Madoff was their friend.”

Creating crises

The Pew Charitable Trust and the Center for Responsible Lending, acting independently, reported last year that the cost of the loans turn temporary financial shortfalls into long-term crises. After rolling their initial loans over, perhaps more than once, borrowers find that they’re paying up to 40 percent of their paychecks to repay the loans.

Prosperity Works, an Albuquerque-based nonprofit striving to improve financial circumstances for lower-income New Mexicans, is a strong supporter of the effort to cap loans.

President and CEO Ona Porter said one drawback of the short-term, high-interest loans is the effect they often have on individuals’ credit ratings. “And credit scores are now used as a primary screen for employment,” she said.

The loans do little, if anything, to boost the state’s economy. A 2013 study by the Center for Community Economic Development found that, for every dollar spent on storefront loan fees, 24 cents is subtracted from economic activity.

UNM’s Martin has conducted five studies related to high-cost lending practices. She firmly believes that low-income people are better off if they don’t take out unlimited numbers of high-cost loans and that such forms of credit cause more harm than good.

“They are neither safe nor affordable,” she said.

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