Avoiding Loans in Disguise
Who is a "predatory lender"?
Most people are aware that a loan is when one party borrows money from another party and that, in almost all loans, the privilege of borrowing money comes at a price. Usually, this price is known as "interest." But these days, determining who's lending to you - and charging you interest you might not want to pay - isn't always straightforward, thanks to the clever names some lenders have given their loans.
Disguised Loan 1: Refund Anticipation Loans (RALs) and Refund Anticipation Checks (RACs)
What they are: These are sometimes offered by independent tax preparers and often advertised as a "way to get your refund faster." In reality, these are loans from a bank secured by your potential tax refund. You'll receive an amount of money less than your total refund because you'll have to pay interest, often disguised as "fees."
Where you'll see them: Around tax time, these loans are especially common. If you take your taxes to a third-party preparer, you may be offered different options for collecting your refund, including an RAL or RAC.
A recent study conducted by the National Consumer Law Center (NCLC) and the Consumer Federation of America found that 30-40% of tax preparers did not tell filers that the RAL was a loan. Some didn't even inform filers that the free, quick method of e-filing and receiving a refund through direct deposit was available.
Why they're tempting: RALs promise money right away, without waiting for your tax forms to be processed. But in the world of electronic transactions, traditional delays have been seriously minimized. If you e-file your taxes and opt for a direct-deposit refund, you should get your money in 8-15 days.
Why they're a bad idea: Not only will RALs mean you get less refund money (because you're paying those pesky interest and bank processing charges), they could lead to debt. If your tax forms contain any mistakes, you could end up eligible for a smaller refund than anticipated - and if you can't pay off your loan's interest, you'll end up owing money. Plus, the NCLC study found that many independent tax preparers made mistakes on forms.
How to avoid them: Ask your preparer about e-filing and direct deposit options. If you get cagey or incomplete answers, or if you still have to pay fees for your refund, walk away without signing anything. Honest tax preparers are out there, and it's worth your time to find one.
Disguised Loan 2: Abusive Overdraft Loans
What they are: These are small, expensive loans made by banks to customers with negative account balances.
Where you'll see them: These days, abusive overdraft loans have become the norm in most banks. Many banks include them as a standard "service." Often, customers don't need to specifically request or sign up for these loans, so they can come as a surprise. They can be disguised as "overdraft protection," "bounce protection," a "courtesy service," etc.
Why they're tempting: Because overdraft loans can theoretically save you embarrassment by allowing you to make purchases with your debit card even when you don't have enough money in your account, many people pay the "fees" on their bills without thinking.
Why they're a bad idea: Most overdraft loans charged a "fixed rate" for each transaction made with an overdrawn account. Because many people use debit cards for relatively small purchases, though, this "fixed rate" comes out to an interest rate of 126-194%. Plus, because of the way banks process transactions, you can end up owing much more than you thought you did.
How to avoid them: Talk to your banker about this one. If you're opening a new account, ask about the bank's policies and request to opt out of any "overdraft protection" they might have. If possible, link your checking account to a savings account or a credit card with a low interest rate, so that if you do overdraw, you'll have an inexpensive backup.
Disguised Loan 3: Credit Card Cash Advance Loans
What they are: Many credit cards offer "credit card checks" or "cash advances" that basically allow you to have cold hard cash right away. Often, cards come with a set credit limit as well as a cash advance limit.
Where you'll see them: Some credit card issuers send the checks along with bills and account statements. Others allow you to take out a cash advance at an ATM.
Why they're tempting: No-brainer - they offer instant cash! Even though credit and debit cards have become prevalent, some purchases still require cash. Credit card cash advance loans advertise themselves as a quick, easy way to get instant access to cash.
Why they're a bad idea: Unlike many credit card purchases, cash advances usually have no grace period, meaning that you'll start paying interest as soon as you take out your cash advance. Worse, most calculate interest on a daily basis, so that the amount you owe can increase drastically in a relatively short period of time.
Worse still, the majority of credit cards put your payments toward purchases first. This means that your cash advance will be the last thing paid for - and it will keep accruing interest until you pay it off!
How to avoid them: If you can borrow money from other sources, like a credit union or friends and family, do so. If you absolutely need cash, pay your entire credit card balance as soon as possible. Your best bet is to avoid these if at all possible.
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