Avoiding Dangerous or 'Predatory' Loans
A cash advance loan is a small, short-term, high-interest loan that is offered in anticipation of the receipt of a future lump sum of cash or payment. Although a cash advance may be made in anticipation of future legal winnings, pensions, inheritances, insurance awards, alimony or real estate proceeds, the most common cash advance loans are Payday Loans and Tax Refund Anticipation Loans.
Payday loans are illegal in New York State. It is a violation of New York State law to make payday loans in-person, by telephone, or over the Internet. It is also illegal for a debt collector to collect, or attempt to collect, on a payday loan in New York State.
What is a Payday Loan?
A payday loan is a relatively small, high-cost loan, typically due in two weeks and made with a borrower’s post-dated check or access to the borrower’s bank account as collateral.
Payday lending is illegal in New York for a number of reasons:
- Payday loans are designed to trap borrowers in debt. Due to the short term, most borrowers cannot afford to both repay the loan and pay their other important expenses.
- If the loan cannot be paid back in full at the end of the term, it has to be renewed, extended, or another loan taken out to cover the first loan. Fees are charged for each transaction.
- The annual percentage rates on payday loans are extremely high, typically around 400% or higher.
- Lenders ask that borrowers agree to pre-authorized electronic withdrawals from a bank account, then make withdrawals that do not cover the full payment or that cover interest while leaving principal untouched.
- If the lender deposits a repayment check and there are insufficient funds in the borrower’s account, the borrower is hit with even more fees for insufficient funds.
New Yorkers should steer clear of payday loans. If you are struggling to pay your bill:
- Ask your creditors for more time. Find out what they charge for late payments, finance charges or interest rates since it may be lower than what you might end up paying for a payday loan.
- Work with a community development credit union or a non-profit financial cooperative, which may provide affordable small-dollar loans to eligible members.
- Ask for a salary advance from your employer, or borrow from family or friends.
- Consult social service agencies, they may have programs to help with food, housing and home heating costs.
To File a Complaint
- Notify the Department of Financial Services at (800) 342-3736 if you believe payday loans are being made in New York or to New York residents, or if a debt collector is seeking to collect on a payday loan in New York.
- File a complaint with the CFPB at www.consumerfinance.gov or by calling (855) 411-2372.
- File a complaint with the FTC at www.ftc.gov or call them toll-free at 1-877-FTC-HELP (1-877-382-4357).
Some tax return preparers offer what they may call ‘instant’, ‘express’ or ‘fast money’ refunds. These refunds are actually loans borrowed against the amount of your anticipated refund. These loans often include extremely high interest rates and high fees. They must be repaid even if you don’t get your refund or it is smaller than anticipated. To avoid the temptation of getting a Refund Anticipation Loan:
- File your tax return electronically and have your refund deposited directly into your bank account. This will speed up your refund. Some refunds will be deposited in as few as 10 days.
- If you don’t have a bank account, open one. All banks in New York State are required to offer low-cost Basic Banking Accounts.
- Go to a Volunteer Income Tax Assistance (VITA) site at your local library or community center. The IRS Volunteer Income Tax Assistance (VITA) and the Tax Counseling for the Elderly (TCE) programs offer free tax help for taxpayers who qualify.
- AARP Tax-Aide helps people of low-to-middle income, with special attention to people who are 60 and older, with taxes and refunds. To locate the nearest AARP Tax-Aide site, call 1-888-227-7669.
Advance Fee Loan Scam
These scams involve a company claiming that they can guarantee you a loan if you pay them a processing fee, an application fee or pay for ‘insurance’ on the loan in advance. The company will advertise on the Internet, in the classified section of a newspaper or magazine, or in a locally posted flyer. They will sometimes use a legitimate company’s name or use a variant of a trusted name. They will sometimes ask you to call them at a "900" number, which will result in charges to your phone bill. They will usually ask to be paid via overnight or courier service or by wire, so that they can’t be traced. In order to avoid being taken in by this scam you should be aware that:
- It is against the law for anyone to ask you to pay in advance to receive a loan or credit card.
- A legitimate lender will never guarantee you a loan or a credit card before you apply, especially if you have bad credit, no credit, or a bankruptcy petition on your credit report.
- These scams should not be confused with
- pre-qualified offers, which mean you are selected to apply and must go through the normal application process, or
- pre-approved offers, which require only verbal or written acceptance.
- Don’t ever give out personal information or agree to a loan over the phone or via the Internet.
Government Grant and Loan Scam
This scam, like the advance fee loan scam, uses the internet, phone and newspaper to advertise. A company claims that they can guarantee a grant or loan from the government in exchange for a fee. Victims are instructed to send money to pay for ‘insurance’ on the promised grant or loan. They will usually ask that the money be sent via overnight or courier services or by wire, so that they don’t leave any trace of their identity or location. They then provide the victim with information that is available in any library or can be ordered directly from the government.
Bounce Protection Programs
Traditional overdraft protection services allows you to avoid bouncing checks by linking your checking account to your savings account or to a line of credit or credit card that you have with the bank.
With overdraft payment programs, also called ‘courtesy’ overdraft protection or bounce coverage, the bank pays any checks that you write, debit purchases or ATM withdrawals that are for more money than you have in your account. The decision to make this payment is at the sole discretion of the bank. The bank will charge a fee for each transaction and some banks will also charge a daily fee until the account has a positive balance. Some banks will charge loan fees, sometimes twice in a billing period. In order to avoid the imposition of additional charges, the customer must repay the bank the amount that it covered plus any accumulated fees.
High Cost Home Equity Loans
Home equity is the value of your home minus the money you still owe on the home. You can sometimes borrow money from a lender by using the equity in your home as security on a loan. Home equity lending fraud occurs when someone talks a homeowner into taking out a loan that they don’t need or that is bigger than they need, or has higher interest rates and higher fees and larger monthly payments than they can afford. If the homeowner falls behind on payments, the lender can take the home.
To avoid Home Equity Lending Fraud
- Don’t give out personal information or agree to a loan over the phone or via the Internet.
- Don’t let anyone who may be working on your home, like a contractor, steer you to a particular lender.
- Don’t borrow more than you can afford. Educate yourself. Know what the prevailing interest rates are. Remember that a low monthly payment isn't always a deal. Look at the TOTAL cost of the loan.
- Learn the real value of your home by getting an independent appraisal.
- Don't trust ads promising "No Credit? No Problem!" If it sounds too good to be true, it probably is.
- Get your credit report and your credit score. See if you qualify for better rates than are being offered.
- Never lie about your income, expenses or available cash to get a loan and avoid any broker or lender that encourages you to do so.
- Avoid early repayment penalties and fees of more than 3% of the loan amount (4% for FHA or VA loans).
- Be aware that credit insurance premiums (insurance that a borrower pays a lender) should never be financed into the loan up-front in a lump-sum payment.
- Don’t ever sign a document that has blank spaces or pages in it that the lender promises to fill out later.
- Ignore high-pressure sales tactics. Take your time and read everything thoroughly.
- Be wary of a lender that promises to refinance the loan to a better rate in the future. A predatory lender will let you keep refinancing a bad loan and will charge fees every time.
- Know that even if you have already signed the agreement you have three days to cancel it.
- Take your documents to a housing counselor near you and have them review the documents or refer you to someone who will. To find a counselor near you, visit the Department of Housing & Urban Development online or call (800) 569-4287.
Auto Title Loans
These are small, high-interest loans given using a car as collateral. If you default on the loan, you lose your car.
When you rent furniture or appliances you will often end up paying much more than it would have cost you to buy that furniture all at once. If you miss a payment the company may repossess the items and you will forfeit any payments you may have already made.
Don’t deal with unlicensed lenders. Make sure a lender is licensed by the State of New York.