Objectives  Identify pitfalls and financial traps in the fringe banking industry  Recognize the come-ons and hype  Understand how to compare the cost of borrowing money (APR)  Describe alternatives to high interest loans or other scams

Too Good to be True?

Fringe Banking  Financial services offered outside of mainstream financial institutions.  Payday Loans  Check cashing outlets  Pawn shops  Advance tax refund  Rent-to-own: furniture, jewelry, etc.

Spotting Fringe Banking  Payday loans  Cash or check advance  Post-dated check loans  Deferred deposit check loans  Car title loans  Rent-to-own shops  Pawnshops  Tax refund advances (Refund Application Loans – R.A.L.’s)

Annual Percentage Rate (APR)  Helps consumers compare how much it costs to borrow money  By law, APR must be listed on loan documents  Always check the APR on loans  Compare APRs from different loans

Cost of Borrowing Money Loan Amount APRInterestTotal Amount Paid $1,0009%$90$1,090 $1,00015%$150$1,150 $1,00021%$210$1,210  The higher the APR, the more money it will cost you.  Some lenders will give you a dollar amount to hide the APR rate

Cost of Borrowing Money Loan Amount APRInterestTotal Amount Paid $5,0009%$450$5,450 $5,00015%$750$5,750 $5,00021%$1,050$6,050  This table shows the difference that a higher rate makes.  At 9%, a $5,000 loan will cost the borrower $450.  At 21%, the same $5,000 loan will cost $1,050

Check Cashing Services  Service provided by fringe lenders  Much more expensive than using a bank  Charge percentage of check as the fee (5-10% or more)  Ask for amount fee in dollar amounts  Don’t sacrifice convenience for cost from your pocketbook  A $250 check with a 5% fee, your cost will be $ A 10% fee will cost you $25.00

Check Cashing: Pros and Cons May be near home Many open 24 hours Other? Must carry a lot of cash Does not establish credit or banking history High fees +-

Check Cashing Alternatives Cash check at the payer’s bank Direct deposit Open a bank account No fees or fees less than check cashing services Money - safe in an account May be able to earn interest Develop a history with the bank ETA (electronic transfer accounts)

Payday Loans

Payday Loan Borrowers Families tend to have less income, lower wealth, fewer assets, and more debt More likely to be a minority, single woman, younger, and less educated. Most end up being delinquent on their loans. Convenience, emergencies, and basic consumption needs (gas, food, etc.). Predatory loans now cost American families $4.2 billion in expenses. States banning payday loans saved citizens over $1.4 billion last year. Payday lenders usually partner with a small local bank.

Typical Borrower Average Principal and Interest Paid back on a Payday Loan Average principal $325 Typical fee for $325 loan $52 Average transactions per year 9 Total interest for original loan + 8 flips $468 Total principal plus interest paid $793

What about Pawn Shops?  Customer brings in an item  Pawn shops tells customer how much it is worth  Gives customer a loan for that amount  Loan is due usually in two weeks  Fee is also added on to the loan.  If the loan is not paid back, the item can be sold.  Or the individual can go and pay the fee again.  Interest rate on these items is usually % annually.

Rent to Own: Want it now?

How Rent-to-Own Works  Customers ‘purchase’ items  Furniture  Electronics  Appliances  Jewelry, etc.  Weekly payments  Costs are two to five times more than a department or appliance store.  Additional costs include fees  What happens if you can’t pay one week?

Rent-to-Own Fees (cost you two to five times more than buying the same item from a store) Reinstatement fees (charged for a late or missed payment and the person wants to continue renting) Processing fees? Delivery fees Set-up/ installation fees In-home collection fees Home pick-up fees Damage waiver fees (insurance for merchandise for the rent-to own store)

Which T.V. Do You Want? Rent-to-Own Television OR Department Store Television $19.99 per week for 78 weeks… Sounds good, but…. $19.99 X 78 = $ 1, ORThe same TV costs $ at a local electronics store. If you save $19.99 for 33 weeks, you will have enough money to buy the TV. $19.99 x 33 = $ The armchair will cost you $1, in the end. ORThis way, the TV will cost you $910 LESS than using the Rent-to- Own store! $1,559 OR $ (days) ÷ 14 (days until fee is charged) x $19.99 (amount) = 521% APR

Rent-to-Own Alternatives Make a plan and put aside some money each pay period to make a large purchase Find reputable stores with layaway plans Shop at thrift and consignment stores. Many times you can get what you want for very little! Points to

Tax Refund Anticipation Loans (R.A.L.’s)  Predatory lending during the tax season  Advertised as “Fast Cash Refunds” or “Instant Refunds”  “Advance” on your tax refund = high- cost loan  Extremely expensive – APRs of 60% to 700%  Often, RALs are not needed. Refunds from IRS can be fast and free!

R.A.L.’s are Risky  Loan must be paid even if IRS denies or delays your refund  Suppose a mistake is made and you are not getting what was promised?  May hurt your credit rating if you do not pay  Lender may take your refund money to pay old debt they claim you owe

Refund Alternatives  E-file with direct deposit  Open a bank account  Wait a few more days for an IRS deposit  Volunteer Income Tax Assistance Sites (V.I.T.A.) TAX-1040 for referral