Wednesday, October 10, 2007

The interest rate is only 99%

Please tell me you’ve seen the commercial for The commercial where a smiling Gary Coleman tells you to call these guys for money when you need a little help? I guess Gary Coleman should know since he hasn’t had a steady acting gig since 1986, when Diff’rent Strokes was cancelled. Apart from a guest spot in 2004 on VH-1’s “The Surreal Life”, the last job I know he held down was as a mall security guard. At the hulking height of 4’8”, shoppers cowered in fear of Officer Gary.

Anyways, I digress. If you read the fine print of the aforementioned Cashcall ad, it says you can get a $2600.00 loan at a 99% APR (annual percentage rate) with only 42 payments of just $216.55.

I’ll let you digest that a moment. Now, after you wipe up the coffee you just spit on the screen, since you probably did the math like I did, think about this: if someone needs a cash loan from a fly-by-night place that badly, do you think they can handle a $216.00 payment every month? That’s more than my light bill was last month, and I know that I found that a bit steep. The average person did a cursory look at 2600 divided by 216.55, and it comes out to 12 payments, and then add maybe one more for interest, right? Not quite, Einstein….that FINE print said 99%!!!!! And it said 42 months!!!! Do that math again…. (insert Jeopardy Theme here)….and you get a total payment of…..$9095.10.

Holy crap, Batman! Ten GRAND! And these companies target the people who can least afford to be grafted & grifted yet need the money the most. That’s just wrong.

Rent-to-own operations like Rentway and Rent-a-Center do the same thing. They suck needy, broke, credit-risk people in with teaser payments on goods that look so great on the showroom floor, and by the time you pay it off you’ve paid three times the MSRP for the item. And you’re really only renting it if you plan to give it back. Otherwise, you’re paying a weekly/monthly fee with jacked up finance charges to buy something, which may or may not have already been used by someone else before it got repoed and squirted with Febreeze to drop off at your house.

These cash advance, title loan, and check cashing places are everywhere, like mushrooms after a heavy rain. I live in a town of approximately 6,000 people, and when I drove around town to check for myself, I found 16 cash advance/title loan/check cashing places, and another 5 alternative financing lenders. That’s freakin’ ludicrous. That’s one for every 375 people in this town. Of course we also have the obligatory Rentway and Rent-a-Center too, and I see their delivery trucks scurrying to and fro like ants at a picnic any time I venture outside.

Under the federal Truth in Lending Act, the cost of payday loans must be disclosed. Among other information, you must receive, in writing:
• The "finance charge" (a dollar amount)
• The annual percentage rate (the cost of credit on a yearly basis)

A cash advance loan secured by a personal check, such as a payday loan, is very expensive and risky credit. Let's say you write a personal check for $115.00 to borrow $100.00 for up to 14 days. The lender agrees to hold the check until your next payday. At that time, depending on the particular plan, the lender deposits the check, you redeem the check by paying the $115.00 in cash or you "roll-over" the check by paying a fee to extend the loan for another two weeks. In this example, the cost of the initial loan is a $15.00 finance charge and 391% APR. If you roll-over the loan three times, the finance charge would climb to $60.00 to borrow $100.00. So you can see how easy it is to go even further into debt doing this.

Again, these businesses, despite their public relations spins to the contrary, are most often located in lower-income neighborhoods and outside military bases, where young people with limited credit are seduced by the prospect of fast and easy money. Though payday lending is primarily regulated at the state level, Congress passed a law in October 2006 that caps lending to military personnel at 36% APR. The Defense Department called payday lending practices "predatory," and military officers cited concerns that payday lending exacerbated soldiers' financial challenges, jeopardized security clearances, and even interfered with deployment schedules to Iraq.

Payday lending is legal and regulated in 37 states. In 13 states, it is either illegal or state law makes it impossible for these establishments to operate. When not explicitly banned, those laws that prohibit payday lending are usually in the form of usury limits: hard interest rate caps calculated strictly by APR. Most states have usury laws which forbid interest rates in excess of a certain APR. Payday lenders have succeeded in getting around usury laws in some states by forming relationships with banks chartered in a different state with no usury caps (such as South Dakota or Delaware). This practice allows the loan to be governed by the laws of the state the bank is chartered in. This is the same doctrine that allows credit card issuers based in South Dakota and Delaware (states that abolished their usury laws ) to offer credit cards nationwide. That’s why every 3 days you get a credit card offer in the mail from a bank in Delaware.

I myself have never used a place like this, but I know folks who have. I used to get daily calls at work from these places looking for my co-workers trying to collect on debts. I’ve seen one guy borrow from one place to pay off another, continuing his debt cycle, and then having to go to a car title loan place to pay off the second lender. His truck has been mortgaged out so many times it’s probably been paid for 3 times over.

No wonder Gary Coleman is cackling like a madman as that commercial ends. He probably got an insane paycheck off the backs of people in debt up to their eyes. Job or no job, dude, have some ethics. As with anything money and credit related, it’s caveat emptor, or buyer beware. Make sure you know what sort of a hole you’re digging, because if you dig your hole too deep, someone’s just gonna pile the dirt on top of you to make room for another check cashing place to be built.


Randy Barnett said...

I think these places have "blossomed" in the last few years due to the record low interest rates. They borrow money at very low rates and loan at very high rates for a high profit. Even with lots of losses, they still make money off of the folks you mentioned.

I'm not sure what the answer is to this. I HATE adding legislation and the people that sign up for these loans are getting what they asked for. But somehow, we have to find a way to discourage these places.

For the record, I've never used one, but my daughter and her husband did rent a big-screen TV (they still have it) and another daughter dated a driver for a rent-to-own place.

John said...

down here in orlando, "amscot" is probably the biggest chain of these "payday loan" places- to the extent that there is now an "amscot plaza" shopping center in altamonte springs.

of course this is just the tip of the iceberg... the big bankers have spent years getting the sheeple used to being in debt, and thinking of it as a good thing- after all, it's like a miniature version of what they've been doing to us on a large scale for years, with their "federal reserve" scam.

this video does a good job of explaining exactly what's going on... when/if the link goes dead, this is the web page for the people who made the video, you can watch it there as well.