Why to stay cau­tious when it comes to short-term loans

The Morning Journal (Lorain, OH) - - BUSINESS - By Ohio Credit Union League

With back-to-school just around the cor­ner, this can mean ad­di­tional monthly ex­penses for a fam­ily house­hold. For some, these un­ex­pected and emer­gency ex­penses can lead to tak­ing out high-in­ter­est loans from fi­nance com­pa­nies with­out re­al­iz­ing what they’re get­ting in­volved with.

Ac­cord­ing to the Ohio Credit Union League’s 2018 con­sumer sur­vey, 30 per­cent of re­spon­dents said they might take out a higher-in­ter­est-rate loan, de­pend­ing on how much of an emer­gency they found them­selves in.

The abil­ity to quickly cover emer­gency ex­penses is gen­er­ally what can make a short-term loan seem like a good so­lu­tion. Ac­cord­ing to BankRate, 61 per­cent of Amer­i­can house­holds would not be able to pay for a $1,000 emer­gency out-of-pocket. That could make a quick in­jec­tion of cash seem like an at­trac­tive op­tion.

But fi­nance com­pa­nies don’t give away these loans cheaply. Western Fi­nan­cial, a third-party or­ga­ni­za­tion that con­nects bor­row­ers with short-term lenders on­line, es­ti­mates that a $1,000 loan with a loan term of 12 months would come with a 24 per­cent in­ter­est rate, a 3 per­cent fee and a nearly 30 per­cent APR.

High-in­ter­est rates com­bined with a shorter amount of time to pay leave many vul­ner­a­ble con­sumers in a cy­cle of debt. And, preda­tory lenders have been known to work around leg­is­la­tion to cre­ate short-term loan scams that can trap con­sumers in a cy­cle of debt, ac­cord­ing to a Finder.com ar­ti­cle.

Bor­row­ers can also take out loans of any term length and in­ter­est rate from tribal lenders based on Na­tive Amer­i­can reser­va­tions. The reser­va­tions are con­sid­ered sov­er­eign ter­ri­to­ries, so these lend­ing in­sti­tu­tions don’t need to ad­here to state reg­u­la­tions, ac­cord­ing to an Amer­i­can Bar As­so­ci­a­tion ar­ti­cle.

The U.S. gov­ern­ment has taken steps to reg­u­late the small-dol­lar, short-term lend­ing in­dus­try in re­cent years. In 2016, the U.S. Con­sumer Fi­nance Pro­tec­tion Bureau in­sti­tuted a rule aimed at short-term and longer-term credit prod­ucts typ­i­cally of­fered to fi­nan­cially vul­ner­a­ble con­sumers. In short, the rule re­quired all lenders to de­ter­mine the bor­rower’s abil­ity to pay the loan back. The rule also re­quired lenders to pro­vide no­tice when they were about to take money from a bor­rower’s ac­count.

Con­sumers should know these are not the only op­tions for short-term loans to cover emer­gen­cies. Ohio credit unions have con­sis­tently helped hard-work­ing Amer­i­cans reach their fi­nan­cial dreams through unique lend­ing op­tions. Here are a few al­ter­na­tives to short-term preda­tory loans.

• Cre­ate an emer­gency fund. The best way to avoid the ne­ces­sity of a short­term, high-in­ter­est loan is to make sure you have enough saved to cover fi­nan­cial emer­gen­cies that may arise. Struc­ture your bud­get, so you’re putting a small amount per week into an emer­gency fund. Over time, it will add up to cover at least part of your next un­ex­pected ex­pense.

• Talk to your cred­i­tors. If you’re be­hind on bills, try talk­ing to your cred­i­tors about work­ing out a pay­ment plan. Many will con­sider low­er­ing or de­lay­ing pay­ment to help you pay off the debt in full. Make sure you un­der­stand any ad­di­tional fees that may be as­so­ci­ated with the new plan.

• Con­sider a life in­sur­ance loan. Many whole-life in­sur­ance poli­cies al­low for loans as long as you have cash value in the pol­icy. Bor­row­ers have their en­tire lives to pay the loan back, and debts that aren’t re­paid will be de­ducted from the amount the pol­icy pays out af­ter the holder dies.

• Find a quick way to earn cash. Con­sider pick­ing up a side-gig or sell­ing un­wanted items for ex­tra money that you won’t need to pay back. You may also want to look into apps that can make users ex­tra cash, in­clud­ing Lyft, Uber, Airbnb and Wag.

• Try a per­sonal in­stall­ment loan. Per­sonal, un­se­cured in­stall­ment loans are of­fered by re­spon­si­ble lenders, in­clud­ing credit unions, banks, and other fi­nan­cial in­sti­tu­tions. In con­trast to fi­nance com­pany loans, these prod­ucts fea­ture min­i­mum 90-day re­pay­ment pe­ri­ods, in­stall­ment op­tions, and lim­its on how of­ten the loan can be re­newed.

Credit unions are uniquely equipped to help mem­bers un­der­stand how to find the best loan for them. To find a credit union near you, visit as­marter­choice.org.

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