Loans to Avoid

Loans you should try and avoid

There was a 10% decrease in complaints about loan scams and fraud in 2017, but the cost to American consumers still went up, reaching nearly $1 trillion.

The Federal Trade Commission issued a report that said consumers reported losing $905 million to scams in 2017, $63 million more than in 2016. The FTC credited education, awareness and enforcement for the positive trend in fewer complaints, but even with all that, consumers are still being taken for millions of dollars in fraudulent loan scams.

Financial scammers have never been more prevalent and they often prey on individuals who previously have been denied a loan.

There are definitely loans to avoid, so consumers must recognize the signs for scams and how to identify them, while also knowing how to spot a legitimate loan company.

How Widespread Are Financial Scams?

About one-in-three adults is a victim of financial scammers, who don’t discriminate by age. They hit Baby Boomers just as hard as they do Millennials.

A study conducted by the University of Pennsylvania’s Wharton School of Business said that seniors are easy targets. Using the Health and Retirement Study, a nationally representative survey of Americans 50-and-over, Wharton researchers found that nearly 33% of 1,260 respondents indicated they had been exposed to financial scams during the past five years, while one-third said that outsiders had used (or attempted to use) their accounts without permission.

The FTC’s data summary of consumer complaints also reported a growing problem of financial fraud with millennials. The FTC study said that 40% of Americans in their 20s who reported fraud in 2017 said they lost money, with a median loss of $400. That was a much higher rate than senior victims of financial fraud where only 18% of the 70-and-older group reported losing money.

The world has changed. Now there’s online banking and brokerage accounts, payday lenders, borrowing from your 401(k), Exchange-Traded Funds (ETFs), variable rate and adjustable mortgages … and seemingly, just as many complex financial scams designed to dupe consumers.

The potential of online loan scams has only accelerated the problems.

“Scams are ever-changing,’’ said Katherine Hutt, spokesperson for the Council of Better Business Bureaus. “We want to help people recognize them and be prepared the next time they get a suspicious call, email, text or solicitation.’’

When it comes to loans, it’s just as important to know which ones to avoid as finding the best remedy for your financial situation. You should recognize the perils of high interest rates, short repayment times and disastrous consequences for defaulting. Payday loan fraud is a particularly difficult issue. Payday loans (which can have an average interest rate between 391% and 521% APR) are well-known for creating problems for consumers, but there are plenty of others to consider.

Types of Loans to Avoid

Here are some loans that are financial traps:

Car Title Loan By using your car title as collateral, you can receive a loan amount worth up to 50% of the car’s value. But the interest rate on a car title loan is usually 25% per month (or at least 300% APR) and must be paid back in 30 days. On a $500 loan, that means you must repay $625 (plus any fees) in 30 days or your car gets repossessed. On some occasions, the loan might be rolled over into another month — meaning an even larger cash outlay – somewhere close to $800 – to pay off interest and fees.

Because these loans are especially popular among military members, the Military Lending Act of 2006 was passed to protect service members and their families against predatory lending. The law caps interest rates at 36% on loans with a term of 181 days or less to repay. It also requires lenders to alert service members of their rights and prohibits lenders from requiring borrowers to submit to arbitration in a dispute.

Two reasons to bypass this loan: a) You might lose your car; b) The government passed a law that limited this loan.

Those factors alone should speak volumes.

Cash Advance Loan Let’s say a business will not accept your credit card. You can pay an extra 3%-5% on the amount withdrawn — plus interest to your bank — and receive a cash advance. The interest charges begin the moment you withdraw the money from a bank (similar to the way it works from an ATM). Cash advances can be used in dire emergencies — maybe a mechanic will only fix your car for cash — but they should generally be avoided.

Overdraft Protection Loan Most banks offer overdraft protection on checking accounts. That allows you to draw money from the bank, even if your account balance is zero. The average bank fee for overdraft protection is $30-$35 each time it occurs. Question: If you are out of money already, how does it help to add a $30 service fee?

Private Student Loan The majority of student loans are made through the federal government, but private student loans are available from banks, credit unions and other lending institutions. Most private student loans have variable interest rates that are higher than the fixed rates offered by federal loans. Private student loans require a credit check, but don’t offer the flexible repayment options of a federal loan. Private student loans are a worse option in every way than government loans. They should only be used as a last resort.

Pawn Shop Loan When you need money fast, you could take something of value, let’s say, jewelry or a computer, to use as collateral for a pawn shop loan.

The pawn shop will lend an amount that is a percentage of the item’s value. There’s likely a short window, usually between 30 and 90 days, to pay it back with interest.

Most states have statutes that limit the interest rates, although they can still be as high as 120% APR. There are additional problems with add-on fees for service, storage and a lost ticket. Potentially, the add-on fees can be more than what you paid in interest charges.

Regardless of any loan, consumers should read the entire agreement, especially the fine print. You must understand the costs, how long you have to repay and the penalties if you default on the loan. Never sign off on a pawn shop loan until you understand all the terms and conditions.

Loan Scams: Be Aware of These

When you need money, and have a poor credit score, it’s easy to accept any offer for a personal loan. But there are scam artists waiting to take advantage of that situation. They might offer personal loans through online website advertisements. They could send a flyer that guarantees a loan, regardless of your circumstance.

Here are some warning signs that are usually experienced by victims of loan scams:

Upfront Fees The lender might disguise these as application fees or document fees or some other name, but they all mean: “Send me some money before I perform any service.” Think about this: You are being asked to send money in order to be loaned money. That’s a scam. Legitimate lenders must disclose all their fees. Typically, they are rolled into the cost of the loan, not paid for in advance.

Phone Offer It is illegal to make loan offers over the phone. Any offer must be put in writing. It must prominently mention all associated fees.

Wire Transfers If the lender wants you to wire money for any fees, it’s a big cause for concern. Never wire money to an individual. Always ask for the lender’s physical address. Then contact the Attorney General or Financial Regulations office in that state to verify it’s a legitimate business.

No Interest in Your Credit History Legitimate lenders evaluate a person’s creditworthiness BEFORE making a loan. Never listen to claims like “Bad credit? No credit? No problem!’’ There’s very definitely a problem. It’s YOUR problem.

Copycat Name In an attempt to appear legitimate, clever scam artists will come up with a business name or website that looks or sounds genuine. It’s always advisable to check with the Better Business Bureau to authenticate the address and phone number. If the mailing address is a Post Office Box, be very wary.

Personal Information Never give out your social security number, date of birth, bank account number or other important personal information unless you are convinced you’re dealing with a responsible lending institution. Personal information can be used for identity theft or stealing from your bank account.

State Registration Lenders and loan brokers are required to register in the states where they do business. You can check registrations through the Attorney General’s office or Department of Banking or Financial Regulation in your state. That won’t guarantee a perfect experience with the lender, but it could help you identify a crook.

Reviews Online reviews have become influential when it comes to restaurants, museums and movies. They can also help you pick a reputable lender. You can simply Google the company or person’s name, while also checking Facebook, the Better Business Bureau or other sites that specialize in lending reviews. If there are complaints or bad reviews, take note. If there’s consistency across several locations, with everyone forming an unfavorable impression, that is a warning.

Customer Service Reputable lenders have a phone number where you can easily call and get your questions answered. If you aren’t comfortable with the customer service, you shouldn’t give the company your business. Don’t settle for the phone robots, either. You should be able to speak with a person.

Red Flags There are several things that should prompt immediate concern. Be suspicious if email messages contain errors in spelling, capitalization, punctuation and/or grammar. That’s a lack of professionalism. Be wary if you’re offered a free period (like a year with no payments) before the loan must be repaid. Definitely beware if the lender says they don’t use credit checks and will lend money regardless of past financial problems.

What to Do If You’ve Been Scammed

If you’ve been the victim of a loan scam or personal loan fraud, contact your local law enforcement as soon as possible. You should also notify your state Attorney General and the FBI (if the company was from another state or country). The Federal Trade Commission and Better Business Bureau will also be helpful allies.

You can file a report with the Internet Crime Complaint Center (IC3), which is a partnership between the FBI, the National White Collar Crime Center (NW3C) and the Bureau of Justice Assistance (BJA).

If you suspect there’s a website that is designed to look legitimate in an attempt to steal users’ personal information, report it to Google.

To file reports, you should provide the following information:
  • Your name, mailing address and telephone number.
  • The name, address, telephone number and web address of the individual or organization who perpetrated the fraud.
  • Specific details on how, why and when you believe you were defrauded.

How to Spot a Legitimate Business

We have talked mostly about warning signs and red flags, but how do you spot a legitimate business lender?

Here are some tips:
  • Research the name of the company itself, along with the company’s state license number, public phone number and physical address, as well as the name of the person representing the company. Be aware of anything that doesn’t seem to match.
  • Call back the phone number to make sure it’s real and you can reach the company.
  • Match the physical address with the license number and phone number, if possible.
  • Search the company’s name online and look for any scam warnings or feedback from other business owners.
Bill Fay

Bill Fay is a journalism veteran with a nearly four-decade career in reporting and writing for daily newspapers, magazines and public officials. His focus at Debt.org is on frugal living, veterans' finances, retirement and tax advice. Bill can be reached at bfay@debt.org.

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