Predatory Lending: living by preying on other organisms; in terms of lending, predatory means practices where a lender takes unfair advantage of a borrower, sometimes through deception, fraud, or terms such as very high interest or fees
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Predatory lending has become a major issue of military readiness, with spiraling debt causing service members to lose security clearances or become distracted from their missions. The significance of this problem prompted the then President Bush to sign H.R. 5122, the John Warner National Defense Authorization Act (NDAA) for FY 07. This act provides new consumer credit protections for service members and their dependents, including limitations on terms of consumer credit extended to service members and dependents.
Congress passed the amendment after the Department of Defense released a report outlining the negative impact of predatory lending on members of the military. The Talent-Nelson Amendment bars creditors—including payday lenders—from charging an interest rate that exceeds 36% APR. In addition, the amendment bars rollovers, mandatory arbitration agreements, and credit transactions in which the creditor gains access to a consumers’ bank account through a check or electronic access.
10 SIGNS THAT A LENDER OR FINANCIAL PRACTICE IS PREDATORY:
-High interest rates/excessive fees
-Lending regardless of borrower’s ability to repay
-“ Loan flipping ”
-Deferred check payment
-Mandatory arbitration clause
-Single balloon payment
-High closing costs
-Fraud or deception
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ARE WE BEING TARGETED?
The GAO identifies the following groups as being especially vulnerable to being targeted by predatory lenders:
-Most are young
-Most are financially inexperienced
-Low incomes and family responsibilities leave them in need of additional cash
- Government paycheck ensures predatory lenders a steady source of income for repayment
YOU ARE BEING TARGETED!!
Think about how many payday loan establishments are located near your base gates. Notice, too, the ads for payday loans in military-affiliated publications. These are not coincidences; you are their target!
These lenders prey on your fear of how your command will react if they discover you are having financial difficulties. These predatory lenders feed on this perception and are ready to "help" you with the reassurance that the command need not know.
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IDENTIFY ONE SIGN OF PREDATORY LENDING.
A. Extremely thorough credit check
B. Debt-to-income ratio test
C. Excessively low interest rates
D. High interest rates
As you read the base paper, you see the following ad for a loan: "Low credit, bad credit, no credit—we don't care—we'll get you the cash you need! Come see us today!" Based on this ad, how would you characterize the lender?
A. PREDATORY LENDER B. REPUTABLE LENDER
WHICH STATEMENT SHOULD ALERT YOU THAT THE LOAN MAY BE A PREDATORY ONE?
The loan will have regular, consistent monthly payments throughout its term.
B. The loan will be granted based on your debt-to- income ratio and credit history.
C. The loan is due in full in two weeks' time.
D. The loan will NOT be flipped into another loan by this institution.
"We're friendly—Come See Us!"
This, too, is probably true because if you're like nine-out-of-ten payday borrowers, you will end up taking five or more of these short term loans a year, with an average payback of $834 for a $339 loan!
Why wouldn't they be friendly and make loans easy and convenient for you?!
CAR TITLE LOANS
Like payday loans, car title loans are marketed as small emergency loans, but in reality these loans trap borrowers in a cycle of debt. Lenders accept the title from a vehicle’s owner as collateral for short-term loans, usually for much less value than the vehicle's worth. Desperate people often sign the contract without reading it completely and surrender the title only to find that if they’re even one day late on a loan payment, the lender has the right to repossess the car, sell it, and keep all the money from the sale.
CREDIT CARD ABUSES
Teaser interest rates for credit cards can be really attractive bait. “Transfer higher interest balances to our card at 0%.” Sounds good, doesn’t it? Be sure to read the fine print and understand exactly how long and under what conditions the rate applies.
Teaser rates can be great deals, but only if you can pay off the debt before the higher rate kicks in.
It’s simple: you just agree to payments that sound low and you can have that bigger TV, kegerator or new living room furniture right now. The predatory lender is counting on the buyer not doing his homework. If a salesman told you the price of a new sofa was $1000, why would you agree to pay $2000 for it? That’s basically what rent-to-own does: it stretches out those “convenient, low monthly payments” until you have paid several times the actual value of your purchase. The disguised effect is to charge interest that often exceeds 500% APR. If you buy a CD player at payments of $39.59 a week which was originally $500, in just 6 months you would have paid $950.16!
WHAT HAVE YOU LEARNED?
A tax refund loan is a good choice for most people because it gives you quick access to money that is coming your way from the government .
Money's tight for Billy. He's a good budgeter, but he doesn't have a lot of extra cash for the unexpected. His tires are pretty bald, so he needs to replace them—nothing fancy—just solid, dependable tires. His account's nearly empty, but he could afford monthly installments over time. He has good credit, and a dependable job—he's a Sailor. Select the type of loan he should AVOID.
A. Car title loan from the business in town
B. Navy-Marine Corps Relief Society Loan
C. Loan from a family member
D. Signature loan from his credit union
HOW DOES THIS AFFECT ME?
The financial impact is important, but so is the impact to operational readiness and a service member's career. Financial problems are the #1 reason security clearances are revoked. A Sailor in a non-deployable status doesn’t help his or her command, and that doesn't help his or her career.
WHAT CAN I DO TO AVOID THIS?
AVOID THE TRAP
The most important thing an individual or couple can do is to create a realistic spending plan and stick to it. It just makes sense not to spend more money than you have coming in.
Live within your means. Give yourself a reality check concerning those need-to-have-it-now impulses.
Be responsible with your use of credit. Use it when you need to, but be sure you completely understand the terms and penalties in case you can’t live up to them.
For those who feel they could use some advice, your Command Financial Specialist (CFS) receives training to help people plan their finances. Every Command has at least one CFS who has received extensive training from the Fleet and Family Support Center (FFSC) on helping people successfully manage their finances.
If you are already involved with a payday lender, plan an exit strategy by seeking help.
IDENTIFY ONE ACTION YOU CAN TAKE TO HELP YOU AVOID PREDATORY LENDING.
A. Only take loans from businesses that employ ex- service members
B. Pay the highest interest rate you can find to ensure you are getting a top-quality loan
C. Have the loan contract reviewed by the Navy Legal Service Office before signing
D. Put your car up as collateral and get a car title loan.
WHICH PHILOSOPHY WILL HELP YOU AVOID THE PAYDAY LENDING TRAP?
A. Live within your means
B. Use a payday loan as a "small emergency only" loan
C. Use a credit card to get the rewards
D. Buy what you want when you want it
WHERE CAN I GET HELP?
The following offer a wide variety of financial assistance, education, and resources:
-Better Business Bureau (BBB)
-Command Financial Specialist (CFS)
-Consumer Credit Counseling Service (CCCS)
-Federal Credit Unions
-Fleet and Family Support Center (FFSC)
-Navy Legal Services Office (NLSO)
-Navy Marine Corps Relief Society (NMCRS)
-Military OneSource: 1-800-342-9647 for advice and assistance, 24/7
-American Red Cross via the Armed Forces Emergency Service Center: 1-877-272-7337 provides 24/7 emergency financial advice and referral
CHECK THIS SITE OUT!!
www.PayDayLoanInfo.org - This site will show you the true cost of a payday loan. Just plug in the amount borrowed and the repayment terms, and the cost will be shown as an APR . You can also check out laws governing payday loans in your state and find links to resources for consumers. If you have never truly looked at payday loans before, this site can be a real eye-opener!
CONGRATULATIONS! YOU MADE IT!
You should now be able to:
Identify signs that indicate a lending practice is predatory.
Identify who is the targeted audience.
Identify strategies to avoid the payday lending trap.
Identify alternatives to using payday lenders or other unwise credit offers.