Payday loans and more: 7 financial products to beware — or they will cost you
Getting all your financial trains to run on time is hard. You get the raise to cover rent and pay down those credit cards — but then there's taxes and your student loans and insurance. Don't have a fully stocked emergency fund? One bad break like a job loss or a medical emergency, and you'll go off the rails.
Of course, you can bet someone has thought of a way to help you out: for a price. In fact, many financial products were created for desperate customers.
The calls can be tempting: "Get cash now!" "We stop wage garnishments, levies, property seizures, and unbearable monthly payments!" But if a company or product seems too good to be true — it probably is.
Before signing up for any service, much less handing over any of your hard earned money, be sure to check the status of the offering company at the Better Business Bureau. And find out more about the industry from the Federal Trade Commission, especially its scam alert page.
Whatever kind of financial bind you're in, there's usually an alternative to these financial products that will be better for you in the long run.
1. Payday loans
In return for fast cash you'll need to offer either a check that is post-dated to deposit when you are next paid, or the authority to transfer money from your account. You may pay up to 591% in interest on that money, according to Pew. So a six month loan of $300 could end up costing $680 to borrow.
The typical user of a payday lender is a white woman between 25 and 44, according to a study by Pew Charitable Trusts. And, according to the study, after controlling for other characteristics, people with one of these five specific characteristics are the most likely to use the services: those without a four-year college degree; home renters; African-Americans; those earning less than $40,000 a year and those who are separated or divorced.
Alternative options: Instead consider a small loan with a lower interest rate from a credit union or reputable lender. Also contact your creditors or loan servicer — whomever you owe money — and talk through your options. You may be able to get a forbearance or a deferment, which while not wiping away your debt, would keep you in good standing while you get organized.
2. Payday loan relief
Let's say you didn't get the word about how dangerous payday lenders are and now you've got payday loan payment to make. You better believe there are companies who want to help you: payday loan relief companies.
According to the FTC, some actual radio and internet payday relief ads said, "Are payday loans ruining your life? Do you have more payday loans than you're able to pay back right now?" and "All you need is two or more payday loan cash advances to qualify. Even if you're behind, in collections or have bad credit. We'll even help you with your internet payday loans."
Time to stop the madness, before it gets worse. There are better ways to dig yourself out of debt.
In reality, these companies don't do anything to reduce your debt and in some cases your debt may grow from increasing interest payments and late fees.
Alternative options: Contact your creditors to see if you can workout a repayment plan. If a payday loan seems insurmountable, talk to a reputable nonprofit debt counseling service, like those approved by the United States Department of Justice.
3. Debt relief
Debt relief or settlement companies are for-profit firms that negotiate with your creditors to determine a lump sum, less than the full amount you owe, that you will pay the companies to resolve your debt.
Best case scenario it goes well — but there are plenty of opportunities for the process to fail: To get this lump sum, debt relief companies often set up an aggressive payment plan where money is put in an escrow account over many months. Often people have trouble making payments and end up dropping out of the program, further damaging their credit and falling further in debt.
Also, according to the FTC, debt relief companies run a snowball program, often focusing on smaller debts first, leaving the bigger debts with higher interest rates for later. There's also the possibility the company engages in fraud and says it will negotiate your debts, but only charges you without actually settling anything.
Walk away from anyone offering to charge you anything before settling your debts, guarantees they can make your unsecured debt disappear, tells you to stop communicating with creditors or tells you there's a "new government program" to bail you out of personal credit card debt. Those are red flags.
Alternative options: After trying to set up a repayment plan or using a nonprofit debt counseling service, as a last resort, you can explore Chapter 13 bankruptcy, which allows people with regular income to keep property, like a mortgaged house or a car and requires credit counseling from a government-approved organization.
4. Tax relief
Tax relief companies promise to reduce or even eliminate your tax debts and stop back-tax collection and garnishments of your wages for a fee, which can be thousands of dollars. The companies say they will provide you tax relief by applying for legitimate IRS hardship programs.
But, in reality, few people actually qualify for these programs. If your situation is not considered a hardship and the tax relief company doesn't provide a refund, which few do, you'll end up deeper in the hole.
In addition to being let down by tax relief companies, there are others who are fakes or participate in fraud. People who have used tax relief companies reported to the FTC that after paying thousands of dollars and enrolling in tax relief programs, the companies took even more of their money by making unauthorized charges on credit cards and withdraws from bank accounts.
Alternative options: If you can't pay your taxes or owe back taxes your first stop should be the Taxpayer Advocate Service, an independent customer service group housed within the IRS, which can help you to know your rights and understand options. One may be paying back taxes through the IRS's Fresh Start program, which offers installment plans and settlements.
5. Credit repair
Some credit repair firms will claim they will improve your credit and give you a "new credit identity." Would that it were true! Some credit repair firms may give you a CPN — a credit profile number or a credit privacy number — or an EIN, an Employer Identification Number, from the IRS and tell you that you can use them to apply for new credit.
Both are legitimate numbers, but they aren't yours. Using these numbers is a scam, and chances are they have been stolen from other people.
Know the warning signs of a credit repair scam. Walk away if a company asks you to pay first before doing any work, tells you to stop communicating with the credit reporting companies, asks you to give false information on a credit or loan application or tells you to dispute information on your credit report that (while unflattering) you know to be accurate.
Alternative options: If your credit score leaves something to be desired, there are steps you can take to on your own, at no cost. Get your free credit report here. Only time and a personal debt repayment plan will improve your credit.
6. Free-but-not-free credit reports
Check your credit! That's what everyone is telling you. But sometimes the best of intentions can get you in trouble.
That's what recently happened to the millions of people who went to check their credit score and got the wrong kind of score — one that lenders do not use — and found themselves enrolled in programs with costly recurring fees.
This dishonesty, in an industry where accuracy on the reports results in very real results for consumers, was in addition to some intentional confusion about how to get the free credit report everyone is able to access each year. The Fair Credit Reporting Act requires that each of the national credit reporting companies — Equifax, Experian and TransUnion — must provide people with a free copy of their credit report once every 12 months.
Alternative options: Your legitimate and free credit report can be retrieved at annualcreditreport.com. If you ever notice you are getting charged for services you don't want, call the company charging you, and let them know you will file a complaint if the fees are not reimbursed.
7. Adjustable rate mortgages
An ARM is a mortgage that offers an introductory or teaser interest rate, which is appealing and low. Then the rate will change, after a certain amount of time. Usually to a much higher rate.
This is all well and good, if you can keep up with the interest rate change. Having a low rate for five years for example, can even be beneficial if you only plan to live in the property for five years.
But ARMs can become dangerous when they reset and the new monthly cost of the mortgage, including the new interest payment, is significantly more than the homeowner can pay. Now, after laying low following the housing crisis, ARMs are making a comeback.
One deceptive practice in mortgage marketing to watch for is ARMs that are advertised as fixed-rate mortgages.
Alternative options: If you are shopping for a mortgage get offers from multiple lenders. Be sure to calculate the cost of the loan, including interest rates and fees, over the entire life of the loan. Knowing how much the monthly payment and interest is now is not enough.
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