Friday May 15th Check-In: Predatory Lending

Which of the following represents a likely reason for a borrower to take out a payday loan?

• A payday lender offers better terms and rates than their credit card.

• They do not qualify for a personal loan or credit card due to poor or no credit.

• Their paycheck covers all of their monthly bills and they want to go on vacation.

• They want to build their credit score by going to store fronts for cash advances.

Which of the following statements about predatory loans is TRUE?

• Rent-to-own total prices are comparable to those you'd find in a store.

• Because payday loans have such high interest rates, they're typically used by high-income households.

• Auto title loans are marketed as long-term loans, similar to a mortgage or student loan.

• Many short-term lenders realize their borrowers will never be able to pay off their loans on-time, but they still lend anyway.

Jake takes out a payday loan of $300. In two weeks, he doesn't have the money to repay it in full. What is one way that Jake can escape the trapping cycle of repayment?

• Jake uses his paycheck to pay the $300, and then immediately takes out another $300 at the same location to pay bills.

• Jake goes to a different payday loan location and takes out a $300 loan there to pay the first payday lender back in full.

• Jake sells his video game system and game collection and pays off the loan.

• Jake pays a $45 fee for not paying his loan off and postpones the loan payment for another 2 weeks.

Which of these best represents a typical interest rate on a "predatory" loan?

• 0% for the first 12 months

• 10-25%

• 50-300%

• Over 1000%

Which statement best describes why payday loans, auto title loans, and pawnshop transactions are sometimes referred to as "predatory lending?"

• Competition to qualify for these loans is fierce, like a predator.

• Lenders "prey" on low-income borrowers who have little to no other options for obtaining a loan.

• The salespeople who work at these locations are often mean and unfriendly.

• "Predatory lending" is an official category the government uses to describe these particular types of loans, based on their fine print.

Predatory lenders do not do credit checks because they use collateral as protection instead. The following can be used as collateral in this industry EXCEPT...

• Your credit card

• Your paycheck

• Your vehicle

• A valuable item

Jayla just moved into a new place and is looking to get a mattress and bed frame, but does not want to use a predatory loan. Which of the following choices would you recommend that she tries?

• Pawn the pearl necklace her grandmother gave her.

• Go to a rent-to-own store to start off with a more affordable starting price.

• Use her credit card for now and pay it off after her first paycheck.

• Take out a title loan on her car.

Which of the following strategies about auto title lenders increasing their revenues is FALSE?

• They charge extremely high interest rates (often over 100%)

• They repossess your car after one late payment to resell for more than its value.

• They charge "hidden fees" for things like initial inspection and making the contracts difficult to interpret so you may not notice them.

• They grant loans for far lower than the actual resale value of your car.

Your friends are discussing how pawn shops work and their claims are provided below. Which of your friends has a strong understanding of pawn shops?

• Kennedy says that pawn shops hope you do not repay your loan so that they can sell your item.

• Angie says that pawn shops offer you a fair market price for the item you are pawning and compares it to the original price that you bought the item for.

• Chuck says that if you do not make your payments on time, pawn shops report you to the credit bureaus.

• Aliyah says that they charge you an interest rate for each month you keep the loan and that you can reclaim your item once you've paid back the loan.

Your brother decides to get a car title loan to pay this month's rent. What kind of questions should he ask the lender?

• What does my credit score have to be in order to take out this title loan?

• What is the APR and how soon must I repay the money?

• How many people are interested in buying a used car in this area?

• Will you be able to pay my apartment directly?