Credit ~ Next Steps

Credit ~ Next Steps

Homework

(Passport page 38)

Welcome!

• Paying Down Debt• Debt Snowball• Predatory Lending Trap• Types of Predatory Loans• Payday Loans• Refund Anticipation Loans• Car Title Loans• Rent-to-Own Contracts• Alternatives to Predatory Loans

How’s It Going?

What Do You Know?

(Pre-Test on page 4)

Pay Off Debt

1. Stop acquiring new debt

2. Establish savings

3. Implement a debt snowball― List all debts from the smallest balance to largest

― Pay the minimum on everything but the smallest debt

― Pay as much as you can on the smallest debt

― When the smallest debt is paid, take the monthly

payment you were making on that debt and add it to the

monthly payment you were making on the second

smallest debt

― Continue this process until you are DEBT FREE!!!

Debt Snowball: Example

Predatory Lending

TRAP

What is Predatory Lending?Unfair

Deceptive

Fraudulent

Preys on the vulnerableTargets lower-income

& minorities

wreaks havoc

Unreasonable

Non-Mortgage Predatory Loans

Car Title Loans

Rent-to-OwnContracts

Payday Loans

Refund Anticipation

Loans

Payday Loans

• Small cash advances ~ $500 or less at a time

• Must repay loan back within two weeks

• Payment Options:

– Postdated personal check

– Authorization for automatic withdrawal

• 195% APR or higher!

• The usual cost is $15 for every $100 borrowed for

a two week period.

Payday Loan: Example

$100 loan( 2 weeks)

$15 fee

390% APR

3,685%EIR

Virginia Payday Loan Regulations

• Limited to $500

• Only one loan at a time

• Term of the loan must be at least twice as long

as your pay cycle

• Cannot be “rolled over”

• Interest charge capped at 15%

– Don’t let this fool you!

– A 15% charge for a 7 day loan is equal to an

APR of 780%!

Refund Anticipation Loans

• Short-term cash advance against an anticipated

income tax refund

• Annual Percentage Rates from 60% to over 700%

– Average is 115%

• Usually beat IRS refund processing by only 5 to 10

days if you e-file

RAL: Real World Example

For a tax refund of $2,000, you might pay:

RAL loan fee: $75

Electronic filing fee: $40

Tax preparer fee: $100

Total: $215

This is over 10% of your refund!This RAL has an APR of 142%,

and it beats the IRS by only 7-10 days.

Car Title Loans

$500 loan =$650 in Interest

Renewed 8X on

Average

Puts Vehicle at

Risk

Payment within 30 days

Triple Digit APRs

Car Title Loans

Car Title Loan Procedures

• Need free & clear title

• Vehicle’s value determined― Loan-to-value ratio generally less than 33%

• Typical loan is around 25% for 30 days― $500 loan becomes a $625 debt (300% APR)

Rent-to-Own

• Merchandise is

“rented” (e.g., TV)

• Weekly or monthly rent

until owned

• No interest rate

disclosure required

• No limit to late fees

charged if payment

missed

Item $217 TV

Payment $10/ week for 78 weeks

Total Cost $780

Interest $560

Annual Interest Rate

230%

Alternatives to Predatory Loans

• Savings accounts

• Salary advances

• Loans from friends, relatives, religious institutions

• Social service agencies

• Working out extended repayment plan with creditors

• Small loans from your bank or credit union

Saving Secured Loans/Credit Cards

• Uses your savings as collateral

– You still earn dividends

• Available credit equals amount in savings

• Help you build your credit score

• Available to almost anyone, regardless of your credit

history

What Have You Learned?

(Post-Test page 16)

Homework

(Passport page 40)

Questions?