Here’s just one of many reasons: Several months ago, I went to one of these places which lends $2,500 per loan minimum and was asked (by a friend) if I could review loan documents. I was asked because I have been in the banking industry for almost three decades. So my friend wanted lending advice. So, I went.
The appearance of the place had the air of a “bricks and mortar” financial institution like a bank. It was located in an older commercial area that was struggling and was slightly blighted. There were a few “mom and pop” businesses that appeared to be just making it and had little foot traffic. The area looked like it could use a good shot in the arm as far as business was concerned, and the area definitely could have used to be revitalized.
They boasted they could have you in and out in about 30 minutes with an ID, check stub, and no credit check. That’s easy— almost too easy! This was the “brick and mortar” version of a loan shark. The APR (interest rate) is beyond astronomical, and you would be paying almost as much as three times the amount you borrow (if you make the regular payments) over the life of the loan about $120 per week.
The plus to this place, if there is one, is that there is no pre-payment penalty— which means you can pay off your entire loan without incurring an early termination fee. “No prepayment penalty” is important, because you will want to pay off this loan ASAP and not get lured into the comfort of making just the $120 weekly payment. My friend has had a bankruptcy, foreclosure and… [a] vehicle repossessed. The $2,500 was being used for the purchase of a private party vehicle for cash.
I began reading the fine print, while my friend was going through the paperwork and stuff. The APR was about 300 percent. Yes, you read this right— not a typo— three hundred percent. In the old days, even if you had crappy credit, some crazy car dealership out there still felt fine lending you money to finance one of their cars. At most, [you’d] probably find yourself with a 30-percent financing deal, but not 300 percent per year, approximately $7,200 per year at around $120 per week. Can you imagine if mortgages were financed that high? Your great-grandchildren would still be making payments in their senior years!
All I could do was gasp in my chair while the pleasant young lady helped my friend get through the paperwork. You’re essentially paying about $15 worth of interest per day if you do not pay off that loan. That’s about $120 per week, almost $500 per month. For a $2,500 short-term loan!
Short-term indeed, if you don’t pay it all back in a matter of months, you’ve already given the lender 100-percent profit. On top of that, they request your check stub and bank account with a voided check. This was to make it easier to take the money from your check or do an automatic withdrawal that is common practice in lending. However, here’s the catch!I asked how they withdrew [it] from the account. They received authorization with my friend’s signature to take it from her bank account and automatically transfer to them with either a voucher they created or transfer which they could charge an administrative fee for. That does not include the transfer fee from the bank. The other thing is the contract waived arbitration should there be any dispute and allowed transferring as necessary to satisfy the loan.
I pulled my friend aside because of my gut feeling and gave her my opinion about the location and that this looked like an “infill business,” entirely based on the low-income depressed area. To my surprise, she said that all that didn’t matter to her, this was an emergency, that she could afford this, and really needed the car [as soon as possible]. She said she could pay it off in a couple of months. So, the deal was done. By the time this was over she had paid almost $4,200 in just a few months even though she paid down the principal.
All of this set aside, the staff was very friendly and pleasant and, in this economy, I guess their only option of employment is working for the lending equivalent of the Devil.
Dan Pressburg
Long Beach
