In this wonderful time of the year when family and friends gather in good cheer to celebrate the holidays, nearly everyone has lists. From greeting cards to shopping for gifts, decorations and more, lists are made and reviewed to keep pace with the barrage of seasonal activities.
But if holiday lists seem bigger than budgets, turning to a high-cost, small-dollar loan can turn joy and merriment into a financial quagmire. The good news is that with a timely reality check, most consumers can avoid holiday financial nightmares.
Walk on by
A key step is to walk or drive past the brightly-colored signs advertising high-cost, small-dollar loans. Both payday and car title loans can provide quick cash, but the harms caused by these loans will likely linger past the winter’s cold. Most importantly, these predatory loans often lead to consumers paying more in interest and fees than for the money borrowed.
Research by the Center for Responsible Lending (CRL) has found that predatory payday loans generate $3.5 billion in fees from repeat borrowers who are unable to fully repay the original loan, usually in two weeks’ time. With average annual interest rates at 391 percent, 9 out of every 10 payday loans go to borrowers who get trapped in five or more loans per year.
Like payday loans, car title loans are often marketed as an easy way to get cash without a credit check – but with interest rates that tend to be 20-30 times higher than that of credit cards. The average car title loan of $500 can only be secured by signing a personally-owned car as collateral.
Further, the loan will only be a fraction of the marketable value of the vehicle. While the lender holds onto a car title, the borrower is faced with triple-digit interest and in the worst cases, the loss of personal transportation.
As harmful as payday and car title loans are, other seemingly harmless small-dollar transactions can also cause financial havoc.
If you believe pre-paid cards will always avoid financial rip-offs, think again. Before paying cash for this convenient form of plastic, read all of the fine print that explains the terms and fees that come with its usage. Terms and options can and do vary significantly.
Many include a range of fees from activation, to learning your current balances, reloading monies and in some cases fees for inactivity. By the time all applicable fees are assessed, the amount of money actually available on that prepaid card can shrink and shortchange how far it can help on purchases.
Similarly, the convenience of debit cards can easily trigger overdraft charges for consumers with slim or no checking account cushions. By keeping track of receipts and balancing checkbooks, consumers using debit cards can usually limit or avoid overdraft fees. Failure to keep track of expenditures on the card can lead to multiple overdraft fees in a single billing cycle.
Worst of all, most consumers using their debit cards never realize the overdraft fees incurred until the next bank statement is received, weeks after the purchases were made. Depending upon your bank or credit union, overdraft fees vary in cost as well as an acceptable number to keep accounts open. Too many overdrafts can lead to involuntary account closures.
CRL research shows that although overdraft fees vary by institution, the average $35 overdraft fee on a debit card is double the amount of the overdraft itself. To date, at least 14 banks have been sued for changing the order of debit-card purchases to maximize fees.
This holiday season, try adding a full measure of practical sense to help your dollars preserve the spirit of the season and all of its celebrations.
Charlene Crowell is the Communications Manager for State Policy & Outreach with the Center for Responsible Lending. Contact her at Charlene.firstname.lastname@example.org.