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BBB Warns of the Pitfalls of Payday Loans

Some payday loans carry interest rates as much as 400% to 700% and may not allow early pay offs.

Southfield, MI (PRWEB) December 19, 2014

Consumers who have financial trouble during the holidays may be enticed to bridge the gap between paychecks by obtaining a payday loan. Better Business Bureau (BBB) Serving Eastern Michigan is warning consumers to be cautious, as these loans typically have very high fees and interest rates as well as questionable sales and collection tactics that confuse and intimidate borrowers.

Payday loans are loans of short duration, usually two weeks, and can be obtained from a physical payday loan store or on the internet. Better Business Bureau receives hundreds of complaints against payday loan companies alleging threats of arrest and notifications to employers about their debt. Complaints also state that consumers who apply for loans online, may not see the full disclosure of interest rates or fees until after they have signed the documents and that there are unauthorized withdrawals from their bank accounts.

Typically, payday lenders do not perform a credit check but ask borrowers to write them a post-dated check for the amount they borrow plus a borrowing and account set-up fee. The lenders will then deposit the check after the borrower’s payday if they have not already paid off the loan. If the borrower’s bank account cannot cover the amount of the loan, they will then owe the original loan plus added interest and they may also incur overdraft fees from their bank. Borrowers can chose to pay more fees to renew the loan if they know they cannot pay it off in time. This practice creates a cycle of consumer refinancing and continuous debt.

Payday loans are regulated in Michigan in most cases. For example, a payday lender can only have one outstanding payday loan per customer for a loan amount of up to $600. A customer may take out a second loan with a different payday lender, and can only have two outstanding payday loans at any given time. The payday lender may charge up to 15% on the first $100, 14% on the second $100, 13% on the third $100, 12% on the fourth $100, and 11% on the fifth and sixth $100.

Consumers should be aware that some payday loan companies, such as those operated by Native American tribes, may have tribal sovereign immunity from laws that govern other lenders. These loans often carry interest rates as much as 400% to 700% and may not allow early pay offs, resulting in a cycle of perpetual debt for the borrower. The Consumer Financial Protection Bureau recently released a report that analyzed payday lending and found that four out of five payday loans are rolled over or renewed within 14 days.

Alternatives to Payday Loans

Before you decide to take out a payday loan, consider some alternatives:

1. Consider a small loan from your credit union or a small loan company. Some banks may offer short-term loans for small amounts at competitive rates. A local community-based organization may make small business loans to people. A cash advance on a credit card also may be possible, but it may have a higher interest rate than other sources of funds: find out the terms before you decide. In any case, shop first and compare all available offers.

2. Shop for the credit offer with the lowest cost. Compare the APR and the finance charge, which includes loan fees, interest and other credit costs. You are looking for the lowest APR. Military personnel have special protections against high fees or rates, and all consumers in some states and the District of Columbia have some protections dealing with limits on rates. Other credit offers may come with lower rates and costs.

3. Contact your creditors or loan servicer as quickly as possible if you are having trouble with your payments, and ask for more time. Many may be willing to work with consumers who they believe are acting in good faith. They may offer an extension on your bills; make sure to find out what the charges would be for that service — a late charge, an additional finance charge, or a higher interest rate.

4. Contact your local consumer credit counseling service if you need help working out a debt repayment plan with creditors or developing a budget. Non-profit groups in every state offer credit guidance to consumers for no or low cost. You may want to check with your employer, credit union, or housing authority for no- or low-cost credit counseling programs, too.

5. Make a realistic budget, including your monthly and daily expenditures, and plan, plan, plan. Try to avoid unnecessary purchases: the costs of small, every-day items like a cup of coffee add up. At the same time, try to build some savings: small deposits do help. A savings plan — however modest — can help you avoid borrowing for emergencies. Saving the fee on a $300 payday loan for six months, for example, can help you create a buffer against financial emergencies.

6. Find out if you have — or if your bank will offer you — overdraft protection on your checking account. If you are using most or all the funds in your account regularly and you make a mistake in your account records, overdraft protection can help protect you from further credit problems. Find out the terms of the overdraft protection available to you — both what it costs and what it covers. Some banks offer “bounce protection,” which may cover individual overdrafts from checks or electronic withdrawals, generally for a fee. It can be costly, and may not guarantee that the bank automatically will pay the overdraft.

The bottom line on payday loans: Try to find an alternative. If you must use one, try to limit the amount. Borrow only as much as you can afford to pay with your next paycheck — and still have enough to make it to next payday.

Collection activities are subject to the federal Fair Debt Collection Practices Act. Therefore, if you have questions regarding debt collection laws please contact the Federal Trade Commission at 1-877-FTC HELP, or online at http://www.ftc.gov. Debt collectors cannot state or imply that failure to pay a debt is a crime.


[…]

Strapped for college cash? New ways to borrow

Private loans are often even higher. Many of the new products also target coding boot camps and other trade schools that aren’t accredited, and so not eligible for federal loans.

But nontraditional student loan models have been slow to catch on. “I remember easily half a dozen to a dozen companies that no longer exist because they weren’t able to make a go of it,” said Mark Kantrowitz, senior vice president at Edvisors.com. “Companies successful at this are no longer doing it.” For example, he said, peer-to-peer student lender Fynanz rebranded as LendKey last year, focusing on loans from the local and nonprofit financial institutions who were often investors under the old model.

Read MoreTo cut college costs, head abroad

Part of the difficulty is on the funding side. It’s not easy to gauge a student’s future earnings potential, let alone sell investors on that opportunity, said Jack Vonder Heide, president of Technology Briefing Centers. Pave’s new loans are a reimagining of its original income-share model, which let backers fund students in exchange for a portion of their post-graduation income rather than a set repayment amount. “We stopped issuing that product in April of this year because of the difficulty in scaling it from the investor side,” said co-founder Oren Bass.

Borrowers also tend to be less aware of the new offerings and more focused on established aid options. Often, rightly so. Current rates on federal subsidized and unsubsidized loans are 4.66 percent for all students, lower than the starting rates for start-ups’ best applicants. “It’s the rare student that is not able to get some aid from their college or the government,” said Vonder Heide. “They don’t really have to dig that deeply to find the money they need to make it work.”

Although Upstart offers loans for uses including paying for tuition and paying off outstanding student loans, since the company’s launch in May, much of the $20 million loaned out has been for other purposes, said Girouard. “The majority, frankly, is paying off credit card debt,” he said.

Read MoreBusiness schools are getting generous with aid

Students should exercise caution before signing on for loans from a start-up, said Kantrowitz. In most cases, it’s an avenue to explore only after traditional routes have been exhausted. “They are not a main way of paying for college,” he said. Fees can easily eat into savings, and some loans are variable rate—not a smart bet with interest rates expected to rise. Federal loans tend to be more flexible on repayment terms, especially if you run into financial trouble.

Sorry, borrowers, but even if the lending start-up goes under, you’ll still owe that outstanding balance. The start-ups have backup servicing companies in place. “There’s no way to make that debt magically disappear,” said Kantrowitz.

[…]

What’s filling the gap in small business lending?

Since the financial crisis, small business owners have had greater challenges getting loans. Traditional banks rarely lend those small amounts, and the community banks that typically serviced those loans have shrunk significantly.

That lending gap has been a boon for a rapidly growing financial product called a merchant cash advance. Business owners can quickly get the money they need, but it can come at a very high price.

Edgar Jones explained that many in his position don’t have other options. Jones asked to change his name for the story. He owns a company that cleans commercial sites. With less than 15 employees, the company makes about $500,000 in revenue each year. After booking a big job to do post-construction clean-up, Jones needed fast cash to buy more equipment. But the bank wouldn’t approve the small loan he was looking for. So he turned to a merchant cash advance, or MCA.

“At that time, you be so vulnerable you take it because you really need the money at that time. After that, that’s when things either go uphill or downhill,” Jones said.

The MCA company deposited the money in Jones’ account and began collecting on that debt the next day.

“When the checks don’t come on time, then they hit your account and then your account is in the negative,” Jones said.

So when the repayment period was up, Jones said his bank account was still being drained. In order to pay off his most recent advance, he had to take on side jobs.

Jones’ credit score wasn’t much of a factor in getting approval for the merchant cash advance. What mattered most was his daily cash flow.

Here’s how it works. The MCA firm will deposit a lump sum into the business’ account, and then repayment can happen one of two ways. The MCA firm could collect by taking a cut of the business’ daily credit card sales. If there’s no credit card sale that day, there’s no collection.

With the other repayment plan, the MCA firm takes a daily withdrawal from the business’ account. If there’s no sale that day, the MCA firm still debit the account. The repayment period is usually a short amount of time, like 90 days.

Sean Murray with the Daily Funder, a merchant cash advance forum, said it’s the business owners’ responsibility to comb over the fine print. He hasn’t heard of bad actors in the industry, but said he’d be disappointed if the contract wasn’t fully explained.

“At the end of the day, if they don’t get back their money. It hurts them, too,” Murray said.

Merchant cash advances first came on the scene in the late 90s, but really took off after the financial crisis. Murray expects this industry to be worth about $5 billion for 2014. That’s small compared to the personal lending industry, but it’s big growth from the millions MCAs earned before the financial crisis.

Murray said the interest rate on an APR basis does seem high, upwards of 80 percent.

“But what’s important to note when we’re talking about costs that are high like that—these loans sound really, really high–is that these loans advertise daily. And so the actual cost of the money might only be 20 percent. Let’s say I give you $10,000 and the cost is $2,000, so that’s 20 percent,” Murray explained.

The MCA might be referred to as a loan, but it isn’t the traditional personal loan with which most are familiar. It escapes the scrutiny of regulation.

“Merchant cash advances are business-to-business transactions. They don’t involve consumers. The consumer protections that exist elsewhere in the market don’t really apply to businesses. It doesn’t mean there are no laws, and it’s a free for all. But the laws are generally pretty lax,” Murray said.

There’s not really a central office these companies report to. It’s not something that state lawmakers are keeping an eye on either.

Murray said people can certainly file any complaints with the Federal Trade Commission. He said the general industry consensus is that self-policing is the best option.

“Regulators come in and have a tendency to see part of the picture. It makes things more difficult for everyone else in the long run. It ends up hurting the customers they’re trying to protect rather than helping them,” Murray said.

Kevin Daleiden is the owner of Flange Advantage in Waukegan. He and two other men sell nuts and bolts out of a warehouse. Daleiden’s taken out at least seven merchant cash advances. He said he’s planned carefully for each one, but has still been caught off guard by fees he didn’t notice in the contract terms.

“One of the hardest things to get out of people at the very front is give me the payoff information. Give me the way I pay this back to you. There’s not a one of them out there that will tell you the facts upfront. And they won’t put it in writing until you’re signing the documents,” Daleiden said.

He said he’s constantly getting calls, emails and letters from MCA firms trying to get him to sign a deal.

“I don’t know how they get my name, but there’s hundreds of these companies out there and I think they call me everyday. I’ve had one gentleman that yelled at me, says ‘you need to give me all your business.’ I said ‘I’ll give my business to who I feel comfortable with,’ and he actually yelled at me on the phone,” he said.

Daleiden is trying to move away from MCAs and toward microloans. He’s now working with the Chicago non-profit Accion for his latest deal.

Microloans are what they sound like, smaller loans to small businesses distributed by a qualified non-profit. Accion services amounts $100,000 and less.

CEO Jonathan Brereton said it’s a better loan option with less than 5 percent defaulting, but MCA firms can distribute the money faster. Brereton admits meeting the demand is a big challenge.

“We think the market has a need and supply, there’s still an enormous gap. So we think we’re only serving about 15 percent of the market demand in Chicago,” he said.

Brereton said this past year has exploded with clients like Edgar Jones and Kevin Daleiden trying to get out from under merchant cash advances. He’s even seen people layering them.

“So they take one, cash flow gets tight. They take another. We’ve seen people take five or six loans from different lenders. All in the 100-190 percent interest range. But no where on any of the agreements does it specify the actual interest rate,” Brereton said.

The gap in small business lending left behind by the financial crisis allowed merchant cash advances to thrive. The product has helped some businesses increase their revenue when they otherwise wouldn’t have.

But Kevin Daleiden said it’s also the reason why some businesses have failed.

“My merchant advances have made them more money than I’ve taken home this year, and I’m doing the work. But I did that knowing it would be expensive. I had a goal,” Daleiden said. “If you don’t’ have a long term goal, a way in and a way out, the merchant advances will kill you.”

Susie An is the business reporter for WBEZ. Follow her @soosieon.

[…]

How to avoid overpaying for a car loan

Americans are shouldering a record amount of auto loan debt, and many are taking on bad loans—either because they don’t see the red flags or they feel they don’t have another option.

Americans owed a record $839.1 billion in outstanding auto loan balances at the end of the second quarter of this year, compared with $751.1 billion the same time a year ago, according to Experian Automotive. The sheer number of loans also grew to 61.6 million from 57.8 million a year earlier.

But while consumers tend to be educated about how to research the fair price of a car, many remain clueless about how to get the best auto loan, said Ira Rheingold, executive director of the National Association of Consumer Advocates.

“People don’t realize dealers make more of their profit these days on the financing,” he said. “You really need to shop for the loan before you shop for the car.”

Read MoreNew study says most can’t afford used cars

One approach recommended by financial advisors is the 20/4/10 rule: put down at least 20 percent in cash or trade-in value; keep the life of your loan to four years or less; and keep your monthly payment below 10 percent of your monthly income.

But before you even set foot in a dealership, make sure you know your credit score and try to obtain financing from a bank or credit union. (The Federal Trade Commission provides an extensive guide to understanding vehicle financing, which includes worksheets to help consumers determine how much they can afford to borrow and what to consider when choosing a creditor.)

Without a loan in hand, you’re more likely to get stuck with an auto loan markup, which allows the auto seller to inflate the rate offered by a third-party lender. “This practice alone adds $25.8 billion in hidden interest over the lives of many car loans,” according to the Center for Responsible Lending.

“Yo-yo” sales can also trap a buyer. That’s when a dealership calls after someone has already signed the paperwork and taken the car home to announce something was wrong with the “conditional” sale. Sometimes the dealer will demand the car be returned and the buyer sign a more expensive loan or face consequences.

“Usually that’s a lie,” Rheingold said.

If a consumer gets a call from an auto dealer saying the contract wasn’t really a contract, they should report the incident to the state attorney general and FTC. But the best bet may be to just return the car and go somewhere else, said Rheingold.

Other red flags to look for include fees you don’t understand or charges for items you didn’t agree to like credit insurance.

Read More5 tips to get the best deal on a car loan

As the overall number of auto loans rise, lenders’ tactics are coming under increased scrutiny. The Consumer Financial Protection Bureau, a watchdog agency set up as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, is seeking to extend its supervisory role to nonbank auto lenders (so-called captive lenders) like Toyota FS, Ford MCC and Honda Finance. The proposed plan, which was announced Sept. 17, is currently in a public comment period.

[…]

How to avoid overpaying for your car loan

Americans are shouldering a record amount of auto loan debt, and many are taking on bad loans—either because they don’t see the red flags or they feel they don’t have another option.

Americans owed a record $839.1 billion in outstanding auto loan balances at the end of the second quarter of this year, compared with $751.1 billion the same time a year ago, according to Experian Automotive. The sheer number of loans also grew to 61.6 million from 57.8 million a year earlier.

But while consumers tend to be educated about how to research the fair price of a car, many remain clueless about how to get the best auto loan, said Ira Rheingold, executive director of the National Association of Consumer Advocates.

“People don’t realize dealers make more of their profit these days on the financing,” he said. “You really need to shop for the loan before you shop for the car.”

Read MoreNew study says most can’t afford used cars

One approach recommended by financial advisors is the 20/4/10 rule: put down at least 20 percent in cash or trade-in value; keep the life of your loan to four years or less; and keep your monthly payment below 10 percent of your monthly income.

But before you even set foot in a dealership, make sure you know your credit score and try to obtain financing from a bank or credit union. (The Federal Trade Commission provides an extensive guide to understanding vehicle financing, which includes worksheets to help consumers determine how much they can afford to borrow and what to consider when choosing a creditor.)

Without a loan in hand, you’re more likely to get stuck with an auto loan markup, which allows the auto seller to inflate the rate offered by a third-party lender. “This practice alone adds $25.8 billion in hidden interest over the lives of many car loans,” according to the Center for Responsible Lending.

“Yo-yo” sales can also trap a buyer. That’s when a dealership calls after someone has already signed the paperwork and taken the car home to announce something was wrong with the “conditional” sale. Sometimes the dealer will demand the car be returned and the buyer sign a more expensive loan or face consequences.

“Usually that’s a lie,” Rheingold said.

If a consumer gets a call from an auto dealer saying the contract wasn’t really a contract, they should report the incident to the state attorney general and FTC. But the best bet may be to just return the car and go somewhere else, said Rheingold.

Other red flags to look for include fees you don’t understand or charges for items you didn’t agree to like credit insurance.

Read More5 tips to get the best deal on a car loan

As the overall number of auto loans rise, lenders’ tactics are coming under increased scrutiny. The Consumer Financial Protection Bureau, a watchdog agency set up as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, is seeking to extend its supervisory role to nonbank auto lenders (so-called captive lenders) like Toyota FS, Ford MCC and Honda Finance. The proposed plan, which was announced Sept. 17, is currently in a public comment period.

[…]

How to avoid online payday loan scams

MEMPHIS, Tenn. — It’s hard to miss all the signs for the payday loan stores on what seems to be nearly every corner in some Memphis neighborhoods.

Banned in Arkansas, but still available in Tennessee, consumer advocates have long warned against the high-interest loans.

WREG spoke with a customer, who didn’t reveal his identity on camera, who was highly aware of the risks.

“So you’re talking about you’re repaying a loan that you know is high interest, but it’s hard to get out of it once you get in it,” the customer admitted.

That cycle of debt is one thing, but experts say there is a greater risk that consumers need to know about.

Better Business Bureau President Randy Hutchinson talked about the dangers of online payday loans with the On Your Side Investigators.

Instead of walking into a brick and mortar store to get a loan, consumers now have more and more options to get payday loans online. Some of the traditional stores have simply added the option to their websites while others are online only.

Experts say while online payday loans may seem more discreet and convenient; there are some serious risks to consider.

“You add the security risk, the risk of identity theft that you’re providing information to somebody that’s online,” explained Hutchinson.

Hutchinson says part of the problem is that customers have no idea who they’re exchanging information with, or if the company is even legitimate!

He also says the company may not even be licensed to do business in your particular state.

The Federal Trade Commission recently helped shut down a Florida based company that was supposed to be offering payday loans to customers, but instead, just stole their money.

In another case, Hutchinson says some of the people never even applied for a loan.

“One of the companies just bought information from somebody else and starting setting up phony loans,” Hutchinson explained.

Whether you’re applying for a payday loan at a store or online, understand the fees and risks, check the company out and pay close attention to your bank account.

The gentleman WREG spoke with says the combination of a tight budget and a family emergency led him to the payday loan store, but he has some advice for others.

“If you can stay away, do so.”

Contrary to popular belief, lots of payday loan customers are working and middle-class families.

Experts say cheaper loan options include getting one from the bank, credit union or even a finance company.

There’s also a cash advance from a credit card, or simply borrowing from a relative.

[…]

Online Payday Loans Cost More, Result In More Complaints Than …

Image onlinepaydayapr.png


Online Payday Loans Cost More, Result In More Complaints Than Loans From Sketchy Storefronts

Image courtesy of DCvision2006

October 2, 2014 By

We understand why someone might opt for getting a payday loan online instead of doing it in person. It’s easier, faster, doesn’t require going to a shady-looking storefront operation where some trained fast-talking huckster might try to upsell you unnecessary add-ons or tack on illegal insurance policies. But the truth is that people who get their payday loans online often end up in a worse situation than they would have if they’d applied in person.

This is according to a new study [PDF] from the Pew Charitable Trusts on the topic of online payday loans.

For those unfamiliar with payday lending, it generally works like this: A borrower needs a relatively small amount of cash — usually a few hundred dollars — and takes out a loan with a repayment window of usually around 10-14 days. At the end of that term, the borrower is supposed to pay back the amount borrowed plus a lump-sum fee that often equates to an annual percentage rate over 100%.

WHAT’S 650% INTEREST BETWEEN FRIENDS?

According to the report, the typical storefront payday loan would charge a fee of around $55 for a $375 loan. That’s an APR of around 390%. While that’s astounding, it’s nothing compared to the $95 lump-sum fee that you’d pay for the same loan from an online; that’s an APR of more than 650%.

Payday loans can also be taken out as installment loans, in which the borrower pays back the principal and fees in smaller amounts over a slightly longer time period. Even then, online loans cost significantly more than storefront offerings, according to the study.

Your typical storefront installment loan will hit borrowers with an APR of around 300%, while online lenders charge upwards of 700%.

BREAKING DOWN BOUNDARIES

Of course, this will vary by lender and by state, as a number of states put limits on the maximum APRs of loans. More than a dozen states either outlaw payday lending outright or have such strict lending limits so as to make it not worth the effort for lenders.

But state laws don’t always stop online payday lenders from offering their pricey loans where they shouldn’t. This past summer, a web of online payday operations were indicted for making loans with triple-digit APRs to residents of New York, in violation of the state’s usury laws.

New York also sent cease and desist orders to dozens of online payday lenders operating from Native American reservations, saying that tribal affiliation does not give a lender the authority to break other state’s laws.

There are several apparent reasons that online payday loans cost more than storefront options. The primary driving force of the higher APRs is the higher rate of defaults and losses for online lenders. The Pew study found that the typical storefront operation needs to use about 17% of its revenue to cover losses, while 44% of what an online lender takes in goes to cover its losses.

Additionally, while storefront operations generally spend minimal money on advertising, online payday lenders spend a significant amount of cash on buying online search terms and lead generation.

SOAK, RINSE, REPEAT

With this risk, it means that online lenders have a more pressing need for borrowers who need to take out repeat loans to cover previous loans.

Even charging a 650% APR, an online lender may need a borrower to re-up his loan three times before seeing a profit.

Thus, some online lenders are pushing borrowers into loans where the only amount deducted each payday is the lender’s fee. That means the principal of the loan does not go down, and the loan is just re-upped for another couple of weeks.

One-in-three online borrowers that Pew researchers surveyed were put into a plan of this sort. And of that group, more than half had to actually call the lender to request that more than the fee be deducted.

Websites for these lenders make this sound like a borrower-friendly idea, with statements like “Online customers are automatically renewed every pay period. Just let us know when you are ready to pay in full, and we will deduct your loan plus fees from your bank account.”

If you borrow $375 with a per-term fee of $95, this lender will keep taking that $95 every two weeks until you can repay the $375 PLUS the latest $95 fee. So repaying the loan after six weeks means you would have paid $660 for a $375 loan.

DUDE, WHERE’S MY MONEY?

The Pew report also found that online lenders were twice as likely to make withdrawals that result in overdrafts for borrowers. Only about 1/4 of borrowers say this had happened to them with storefront payday lenders, while nearly 1/2 of online borrowers had experienced this problem.

“I got in a situation where people were taking money out of my account without me knowing,” says one borrower quoted in the report, “and they were taking money out, just kept taking extra money out. … I didn’t know nothing about it, but my bank stopped them. … They were like, ‘You’re having all this money coming out, and you don’t have this money in your account, so what’s going on here?’ … I had to switch banks.”

One-in-three online borrowers also reported unauthorized withdrawals from their bank accounts, while another 20% say they received a loan or payment that they did not apply for or authorize.

At the request of the Federal Trade Commission, a court recently shut down a network of payday lenders that was using info from payday lead generators to allegedly dole out unauthorized loans and then start helping themselves to fees from those same bank accounts.

30% of online payday borrowers say they had received at least one type of threat — whether it be the dangling sword of arrest, or claims that the borrower’s family or employer would be contacted about the debt:

SO FEW LENDERS, SO MANY COMPLAINTS

Looking at this info, it may not surprise you that while online payday lenders only account for about 30% of the market, they make up nearly 90% of the payday-related complaints filed with the Better Business Bureau.

And one single business — AMG Services — accounted for nearly 33% of all these complaints. You might remember AMG from its two-year-long legal battle with the FTC, or the fact that I dubbed it one of the scammiest payday lenders I’d ever come across.

October 2, 2014 By

Tell a friend:

[…]

Why Pension Advances Are a Really Bad Idea

People do crazy things when they’re desperate. But here’s a move that takes even desperation too far: selling the rights to your pension.

Why not cash in your pension?

A pension advance, as salespeople call it, doesn’t sound too bad, sort of like borrowing on your 401(k), right?

Wrong.

And, just to be clear, it’s not a good idea to borrow from your 401(k) either. But at least 401(k) loans are subject to lending rules that protect borrowers.

Not so, apparently, with pension advances, in which a company offers you a lump sum of cash now in exchange for the right to your pension checks for a period of time. These deals are unusually expensive for people using them to get their hands on quick cash.

The rules aren’t clear

It’s not clear what authorities, if any, oversee companies that offer pension advances.

The Government Accountability Office, in reviewing the industry’s business practices, recently contacted eight federal agencies with possible authority over pension advances. Each had reasons why it wasn’t conducting oversight or educating consumers.

“Federal laws clearly prohibit military retirees from assigning their pensions and the Internal Revenue Service code that covers private pensions also prohibits the practice,” says a Forbes article. Nevertheless, pension advance companies continue marketing to pensioners.

Interest rate: 46 percent

The GAO found 38 pension advance companies nationally. All were Internet-based, and at least 21 were affiliated with each other.

Their pitches may appeal especially to people in financial distress or those who, because of poor credit, can’t get a bank loan. The Federal Trade Commission explains how the deals work:

Pension advances, also known as pension sales, loans, or buyouts, require you to sign over all or some of your monthly pension checks for a period of time — typically five to 10 years. In return, you get a lump sum payment, less than the pension payments you sign over. So, unlike other types of cash advances or loans, taking out a pension advance means signing over money you need to live on.

The GAO describes the costs for consumers:

For example, the effective interest rates on pension advances offered to the GAO during its undercover investigation typically ranged from approximately 27 percent to 46 percent, which were at times close to two to three times higher than the legal limits set by the related states on the interest rates assessed for various types of personal credit.

Ask these questions

The advances are funded by investors who are looking for profit and an income stream. They, too, stand to lose money, the Financial Industry Regulatory Authority warns.

The FTC lists six questions to ask if you are considering selling your pension rights. Among them:

What are the tax consequences for taking an advance?Will you be required to purchase life insurance naming the pension advance company as the beneficiary?Has the company been the subject of complaints?

Consider these seven alternatives

If your back is against the wall, here are seven safer sources of emergency cash:

Try credit unions and banks. Don’t assume you can’t get a loan from a credit union or bank without first investigating. Lenders’ standards and policies have relaxed some since the post-recession credit crunch. “Some banks may offer short-term loans for small amounts at competitive rates,” the FTC says. Tap your 401(k). If you’re like most Americans, you’re going to need all the money you can get in retirement. Borrowing against it could lose you valuable growth. It’s risky, too: If you lose your job, you’ll have to repay the whole thing within 60 days. Nevertheless, it’s safer and undoubtedly cheaper than selling the rights to your pension. Talk with a finance company. Also called small loan companies, these typically charge higher rates, but they do make small, short-term loans, often serving borrowers with weaker credit. Shop around. Beat the bushes for the lowest possible cost of borrowing. Compare the APR (annual percentage rate) of each loan you’re considering and choose the lowest rate. Hit up family. It’s miserable to ask family members for a loan. But the embarrassment is better than an old age spent eating out of garbage cans. Get inventive. There are many ways you may not have considered to scare up hundreds and possibly even thousands of dollars. These tactics probably won’t solve the immediate problem if you need money fast, but they’ll help you pay back a loan faster. You’ll find dozens of ideas by searching Money Talks News. Tighten your belt. Even careful money managers can be hit by a true emergency for which they’re unprepared. But if your problem is more the result of careless spending, take heart: You probably can save quite a bit by trimming fat from your budget.

After you’re back on your feet, build an emergency fund to help keep the wolf from the door in case you’re in financial trouble again.

This article was originally published on MoneyTalksNews.com as ‘Why Pension Advances Are a Really Bad Idea’.

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Payday loans can lead to debt spiral – Insight News

View Comments Short-term loans may be useful but should be used sparingly

With many consumers still on shaky financial footing after the Great Recession, some choose to explore payday loans, be it from a brick and mortar store or through an online payday lender. While there are certainly instances where payday loans can help bridge small financial gaps, Better Business Bureau of Minnesota and North Dakota (BBB) is warning consumers that it’s important to have a plan in place to pay off such loans quickly and to be sure to research the payday lender before agreeing to such loans.

“Though some payday loan companies are making small steps towards self-regulation, overall it’s still a problematic industry,” says Dana Badgerow, president and CEO of BBB of Minnesota and North Dakota.

Payday loans are small, short-term unsecured loans, which – ostensibly – are to be repaid when the borrower receives their next paycheck. Historically, in regard to payday loans, exorbitant interest rates have been a problem, with some loans running in excess of 500 percent annual percentage rate (APR). In some cases, borrowers find themselves unable to pay off these loans, leading to added interest and often resulting in a debt spiral that is difficult to stem.

All payday lenders offering loans to Minnesotans – including online payday lenders – must be licensed with the State of Minnesota. Minnesota law also caps the amount of fees that can be charged on payday loans. According to the Minnesota Attorney General’s Office, for payday loans less than $350, Minnesota rates are capped on a sliding scale. For loans between $350 and $1,000, payday lenders cannot charge more than 33% annual interest plus a $25 fee. The AG’s Office encourages people to avoid payday loans which fail to meet these caps.

In some cases, desperate individuals seek out loans from online payday lenders that claim they are not beholden to state or federal laws regarding licensing requirements, debt collection practices or caps on interest rates. This can lead to a number of issues for consumers, including:

Being subject to exorbitant interest rates and hefty or hidden fees
Unauthorized withdrawals from bank accounts
Possibly even identity theft

Better Business Bureau is aware of many situations in recent years where people explored online payday loans before deciding not to go through with them. Still, simply providing some of their personal information online with unscrupulous entities later led to harassing collection calls threatening some individuals – who had ultimately never taken out payday loans – with arrest unless immediate payments were made.

Before seeking out a payday loan, BBB recommends the following:

• Consider all your options. Payday loans can be extremely expensive if you are unable to pay the loan off quickly. The Federal Trade Commission recommends looking into a short term loan from your bank, contacting your current creditors to explore payment options, working with a credit counseling center or at the very least, shopping around for the best interest rate and terms. Because of concerns with some online lenders, try to find a brick and mortar location before settling on a lender.

• Know the facts. Be aware that loans from Sovereign nations may not be subject to state law or loan caps. Make sure you understand all the terms of conditions of any payday loan.

• Look for the red flags. Unscrupulous online lenders are often not forthcoming about their location or contact information. Also be leery of any lender that doesn’t ask you for any background information outside of your bank account number.

• Research the lender with BBB. Always research payday lenders – whether they’re brick and mortar locations or online – at bbb.org before you hand over any personal or bank account information. BBB Business Reviews are free and will tell you how many complaints BBB has received, how the company responded to those complaints as well as their overall letter-grade rating.

The mission of Better Business Bureau is to be the leader in building marketplace trust by promoting, through self-regulation, the highest standards of business ethics and conduct, and to instill confidence in responsible businesses through programs of education and action that inform, assist and protect the general public. We are open 8 a.m. to 5 p.m. Monday through Friday. Contact BBB at bbb.org or 651-699-1111, toll-free at 1-800-646-6222.

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