Lending Options to Avoid

While there are many legitimate loan services providers, there are several that are best avoided. Sometimes called “storefront financial services,” these can charge your students extremely high interest rates, charge large fees, or hide costs in the agreement. If that’s the case, why would anyone use these providers?

Here are some common reasons:

• They need money right away.
• Banks seem intimidating.
• Payday loans are easier and faster than going to a bank and applying for a loan.
• Money orders are easier to use than opening a checking account.
• Rent-to-own stores allow the use of furniture or appliances right away without requiring the money to pay for items immediately.

Help your students see the value in opening checking and savings accounts with reputable financial institutions. Encourage them to improve their credit ratings so they can qualify for a loan at a bank instead of using a payday lender or pawnshop. Emphasize the value of reducing their debt and living within their means so they don’t see these services as their only option because they have poor credit.

Below are some storefront financial services to avoid.

Check-cashing stores charge fees for cashing checks. Fees range from 2.5 to 8 percent for every $100. So, for example, there’s an $8 fee to cash a $100 check. While it doesn’t sound like much money, it adds up over time. Plus, it’s unnecessary. Many banks don’t charge fees to cash checks for their customers. A good exercise with your students for this and the other examples below is to use an actual example of someone who uses these services and see what they end up spending over a month, six months, and one year on the fees. It will amaze them, and there will be those in the class who run right out and open a checking/savings account because they have been using this unfortunate method for cashing their checks. Make sure they choose wisely when looking at financial institutions, because even some of the most established and reputable ones may charge a check-cashing fee for their members/depositors.

Payday lenders loan money to people with a checking account and a job. To use this service, individuals write a personal check to the lender and postdate it, which means dating the check on a date in the future. Generally, the date is the next payday, and the lender will wait until that day to cash the check, then charge a fee for providing the service. The payday lenders charge very high fees—sometimes as high as $25 for each $100 requested. For example, if the customer wants to receive $100 today, a payday lender will ask for a check totaling $125 and promise not to cash it until the next payday. That translates into an incredible 25 percent interest rate for a short-term loan. Again, do this scenario as an exercise over a one-year period and the message becomes clear.

Money orders are sold at numerous places and may be used to pay bills instead of checks from a checking account. Money orders definitely have a place in paying some bills, but because they cost money, they shouldn’t be used frequently. While each money order doesn’t cost a lot, over time it can add up if several money orders are purchased every month.

Pawnshops loan money in return for an item such as Native jewelry or crafts, farm equipment, or other items of value. The shop must keep the pawned item for at least 30 days, during which time the owner can repay the loan. If the loan goes unpaid, the store keeps the pawned item and puts it up for sale. Pawnshop loans generally total less than half of an item’s worth, which translates into you receiving only a small amount of money for the risk involved with losing a personal possession valued much higher.  Some Native families risk losing family heirlooms by getting to far into debt with pawnshop loans.

Auto pawnbrokers take the pawnbroker idea a step further by collecting a vehicle’s title in exchange for a loan. Any missed payment could result in repossession, as the broker would claim the vehicle and keep any payments made to that point.

Rent-to-own stores offer furniture or appliances for rent and promise that a portion of each payment will be credited to the purchase of the item. However, since the bulk of each payment is claimed by the store, the ultimate purchase price could be three to 10 times as much as the item would cost new. Unbelievably, many states do not limit the interest rates charged by these stores, and some don’t even require that the store inform consumers about how much total interest will be paid. There are many rent-to-own operations that take advantage of isolated rural and reservation locations by offering deliveries and doing on-site shows and offering “free” delivery of the purchase. Saving for a new couch or TV looks much better on paper (and in reality) if you are able to compare with these misguided financial practices.

Sub-prime lending practices are used to extend credit to borrowers who do not meet the credit standards for prime-market borrowers. While this form of lending allows people with blemishes on their credit records to receive loans, the fees and interest rates can be excessively high and include prepayment penalties. Investigate such loans thoroughly before accepting. See the section on Predatory Lending.

Get-rich-quick ideas only make the seller of the product or service rich—no one else. These include lotteries, some work-at-home opportunities, and pyramid sales schemes. Generally, these schemes require an up-front fee and regular payments for information regarding goods or services that probably don’t exist. The only proven way to get rich utilizes the slow approach of saving.