The CFPB’s New Payday Lending Rule is a Big Win for Socially Responsible Lending

opploans-affects-of-CFPB-payday-loans

Payday and title lenders will be tasked with making sure their customers can actually afford their products.

Last week, the Consumer Financial Protection Bureau (CFPB) finally announced a new rule aimed at curbing predatory payday debt traps. The rule marks a large step forward for the bureau’s attempts to regulate the payday and title lending industries and to protect vulnerable consumers.

“The CFPB’s new rule puts a stop to the payday debt traps that have plagued communities across the country,” said CFPB Director Richard Cordray in a press release. “Too often, borrowers who need quick cash end up trapped in loans they can’t afford. The rule’s common sense ability-to-repay protections prevent lenders from succeeding by setting up borrowers to fail.”

“Only time will tell if these “full payment tests” will lower the number of full payment loans given to those who can’t pay them back,” says finance writer Jen Smith (@savingwithspunk). “Someone will eventually find a way to manipulate it for their gain but I think it’s a step in the right direction and a sign the CFPB is still working to protect consumers.”

So, okay, awesome. But what does all of this actually mean?

Let’s break it down, shall we?


What are payday and title loans?

The new rule primarily affects payday loans and title loans, but it will also apply to deposit advance products and certain longer-term loans (up to 45 days) that feature “balloon payments” towards the end of the loan’s term.

If you’re not familiar with payday and title loans, then we’ll give you a brief refresher:

Payday loans are short-term, small-dollar personal loans. They usually have principals of a few hundred dollars, and the average length of their repayment term is only two weeks. Payday loans are no credit check loans, which means the lenders do not check a customer’s credit score during the loan application process.

The loans are designed to be paid back all at once, oftentimes through a post-dated check that the customer gives to the lender when the loan is issued or through a debit agreement wherein the lender can automatically withdraw the funds from the customer’s account.

If a customer can’t pay the loan back on time, they might be given the option to roll the loan over (extending the due date for an extra fee) or taking out another loan immediately after they’ve paid the first loan off.

Because payday loans charge interest over such a short repayment period, their annual percentage rates are astronomical compared to traditional loans. While their rates may vary, they’re often in the neighborhood of 300 percent or even higher!

Title loans are another kind of short-term loan that use the borrower’s car title as collateral. If the borrower cannot pay the loan back, the lender can seize their car and sell it in order to make up its losses.

Because they’re secured by collateral, title loans have much higher principals than payday loans. However, they are also built to be paid back all at once—a structure that’s known as “lump sum repayment.”

The average term of a title loan is only a month, but the average interest rate is 25 percent, which means that their average APR is 300 percent! If a borrower cannot pay their loan back, they might be forced to extend their loan, again and again, each time racking up additional costs without ever getting closer to paying down their original principal.

When the CFPB talks about the payday debt trap, they’re talking about situations like that.

The CFPB’s rule centers around the “full payment test.”

Payday and title loans are bad credit loans, which means that they’re aimed at people with low credit scores. These are folks who often have low incomes and little-to-no life savings, and their bad credit scores have cut them off from borrowing options at traditional lenders. When they encounter a financial emergency or find they can’t make ends meet, they see payday and title loans as possibly their only choice.

In situations such as these, it might seem like a blessing to them that payday and title lenders do not check their credit scores or their ability to repay their loan. Doing so might lead the lender to deny the customer’s application.

However, the CFPB sees things a little bit differently. They believe lenders should be checking a customer’s ability to repay their loan the first time—without rolling it over or reborrowing. That’s what their new rule is going to make lenders do.

Here’s how the CFPB’s new “full payment test” rule will work

The CFPB’s full payment test will require that lenders determine whether a customer can afford to repay their loan while also affording their other major financial obligations, including living expenses.

  • For payday and title loans that require lump sum repayment, the CFPB is defining full payment as “being able to afford to pay the total loan amount, plus fees and finance charges within two weeks or a month.”
  • For longer-term loans with balloon payments, the CFPB is defining full repayment as “being able to afford the payments in the month with the highest total payments on the loan.”
  • Lenders will be required to “verify income and major financial obligations and estimate basic living expenses for a one-month period—the month in which the highest sum of payments is due.”
  • The rule will also cap the number of loans that can be taken out by a borrower “in quick succession” to three.
  • Once a borrower has reached their third loan, the CFPB’s rule will mandate a 30-day “cooling-off period” before they can take out another loan.

Lenders can skip the full payment test if they offer a  “principal pay-off option.”

The CFPB will offer an exemption from this full payment test for certain short-term loans if the lender offers customers a “principal pay-off option.” This option is designed to get consumers out of debt gradually over time—more like traditional installment loans.

  • If a customer can’t pay their loan off on time, they will be given the option of paying it off over two subsequent loans, each with a smaller and smaller principal amount.
  • The customer will have to pay off at least one-third of their original balance with each loan.
  • The rule will be restricted to loans with principals of $500 or less.
  • These loans cannot use a car title as collateral or be structured as open-ended lines of credit.
  • The lender is prohibited from offering this option over more than three loans.
  • The rule also prohibits the lender from offering this option to a customer “if the consumer has already had more than six short-term loans or been in debt for more than 90 days on short-term loans over a rolling 12-month period.”

Some lenders and loans will be exempt from this rule.

The CFPB does carve out some space for lenders whose loan volume is either very small or who are already following guidelines meant to protect customers from predatory payday lending.

According to the CFPB’s press release, “These are usually small personal loans made by community banks or credit unions to existing customers or members.”

Lenders will be exempt if:

  • They offer “2,500 or fewer covered short-term or balloon-payment loans per year.”
  • They derive “no more than 10 percent of its revenue from such loans.”
  • They are offering loans that “generally meet the parameters of “payday alternative loans” authorized by the National Credit Union Administration.”

The rule also “excludes from coverage certain no-cost advances and advances of earned wages made under a wage advance program.”

The rule institutes a “debit attempt  cut-off”

This last feature of the CFPB’s new rules involves a lender’s attempts to continually debit a customer’s bank account for the amount owed.

The reason for this is simple: If a person is unable to repay their loan, repeated debits on their account will only rack up additional bank fees and could even lead to them losing their account altogether.

This section of the rule applies short-term loans, as well as any longer-term loan with an APR above 36 percent. It has two main features:

  • After two straight unsuccessful debit attempts, a lender must stop debiting the account until they get a new authorization from the customer.
  • If a lender is going to debit a customer’s account “at an irregular interval or amount”, they must first give them written notice.

“The rule is a great step forward in protecting consumers but we still have room to grow,” says Smith. “I suggest people never give a creditor your debit account information because they will not stop debiting your account until they’re paid in full. The debit attempt cutoff rule will save consumers a lot of fees associated with this problem.”

So what happens now?

Well, that’s a tricky question, isn’t it? The rules won’t fully take effect for 21 months—which means mid-2019. Between now and then, a lot could change. There could be lawsuits, for instance, or there could be attempts by the payday lending industry to compromise with the CFPB in return for some relief from regulation.

Director Richard Cordray’s terms will be up in 2018 before the majority of these rules are in effect. He was an Obama appointee, while his successor will be appointed by Trump. It’s safe to say that whoever ends up replacing might have fairly contrary views to those held by Cordray.

Certain corners of the payday lending industry are predicting a mini-collapse if these rules take effect. They claim razor-thin profit margins that won’t be able to withstand the burdens that these regulations place on them.

The biggest worry with this new rule is that customers for whom subprime loans are their primary access to credit will find themselves cut off entirely.

However, the biggest hope is that financial institutions of all sorts will rise to the occasion and start offering better, more affordable, more socially responsible products to customers with not-so-great credit.

Only time will tell, but as a company that is already offering people with poor credit a safer and more affordable alternative to predatory payday loans, all of us here at OppLoans are pretty dang optimistic.

What do you think about the CFPB’s new rule? We want to know! You can email us or you can find us on Facebook and Twitter

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Contributors
Jen Smith is a personal finance and debt payoff expert. She has been featured on Student Loan Hero, The Penny Hoarder, and AOL Finance. Her website is SavingWithSpunk.com

How to Money, Episode 6: What is a Payday Loan?

How to Money, Episode 5: What is a Payday Loan?

It’s October, which means it’s time to get a little scary. That’s why our new episode of How to Money is focused on one of the scariest financial products there is…

Payday Loans!

What’s a payday loan?

Payday loans are a type of short-term personal loan. They are almost always no credit check loans, which means that the lender won’t check your credit score as a part of your loan application.

Payday loans come with very short repayment terms—averaging only two weeks in length—and APRs that are ridiculously high—even in comparison to other kinds of bad credit loans.

If you’re not careful, a payday loan could trap you in a cycle of debt. We’ll talk more about that below.

Due to their short terms, high rates, and the higher likelihood that borrowers will become trapped by their debt payments, payday loans are generally considered to be a form of predatory lending.

How do payday loans work?

Payday loans are small-dollar loans, usually around $300-400. In contrast, the average personal loan balance in 2017 was $7,603, according to TransUnion.

With a traditional payday loan, the only thing you need to secure the loan is a postdated check for the amount you borrow, plus interest, that you give to the lender. They then cash the check on the loan’s due date.

(Many payday loans nowadays are online loans. Online payday lenders often opt to automatically withdraw the funds directly from your bank account.)

The idea behind payday loans—with the short terms and low principals—is that they are only supposed to last you until your next payday. But the reality is something different and is something much, much scarier.

Let’s say you take out a 14-day payday loan with an interest rate of 15 percent. Sounds reasonable right?

Well, that loan’s interest rate doesn’t look so good when you compare it to the rates for other, longer-term loans.

The best way to measure a loan’s cost in comparison to other loans is to measure its annual percentage rate or APR.

Now, remember, that payday loan’s 15 percent interest rate only applies to a period of 14 days. If you measure how much it would cost over the course of one year, you get an APR of almost 400 percent!

But is that what your typical payday loan looks like? Well, if you believe this 2013 study from the Consumer Financial Protection Bureau (CFPB), then, yeah, that’s exactly what it looks like. They may not be as expensive as credit card cash advances, but they’re still way more expensive than your standard personal loan.

It’s those high APRs and short repayment terms that can lead many payday loan borrowers to get trapped in a dangerous cycle of debt.

(Many of these traits are also shared by title loans, another type of lending that’s widely thought of as predatory.)

The payday debt cycle.

There’s one other element that plays into the predatory debt cycle, and that’s lump-sum repayment.

Basically, payday loans are designed to be paid back all at once. This is different from installment loans, which are structured to be paid back in a series of smaller, regularly scheduled payments over time.

Combining lump-sum repayment with short loan terms means that many payday loan customers can’t pay their loan back on time.

Think about it. If you had two weeks to pay back 345 dollars, could you?

Some people then roll their loan over, extending their due date in return for paying more interest. With loan rollover, you get another two weeks to pay back the loan, but you have to pay the interest fee on an additional loan term. (It’s illegal in many states.)

Other people pay their loan back in full and then immediately take out a new one to cover other expenses. That’s because they paid it off using money that they needed to use on rent or their gas bill or on groceries.

In fact, a report [PDF] from the Pew Charitable Trusts found that only 14 percent of payday loan customers have the room in their monthly budget to pay off an average payday loan.

How often is this kind of stuff happening? Well, according to another CFPB study [PDF], over 80 percent of payday loans are rolled over or followed by another loan within 14 days.

Either way, people just keep extending or reborrowing their payday loans, racking up more and more interest, all the while never getting any closer to paying back the loan principal and actually getting out of debt.

That is how the debt cycle works, and that is why most people consider payday loans to be a form of predatory lending.

Here Are Your Takeaways

  1. Payday loans are short-term, small-dollar loans with very high APRs.
  2. Their payment terms often lead to loan rollover and reborrowing.
  3. They can easily trap people into an unending cycle of debt.
  4. Do not take out a payday loan.

If this your first time watching How to Money, you should check out our other How to Money episodes, where we cover secured loansthe debt to income ratio, and more! You can request topics for future How to Money episodes by emailing us or by shooting us a tweet at @OppLoans.

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5 Alarming Payday Loan Statistics

Payday Loan Statistics

Expert data on affordability, loan rollover, and APR that will make you think twice before borrowing.

You know payday loans are bad. But you might not have realized just how bad they can be.

That’s why we’ve gathered some stats, figures, and numbers to show you just how terrible and destructive payday loans are. Now come along with us on a magical journey through the dangerous world of payday debt.


1. APRRRRRRRGH

APR stands for annual percentage rate, and it’s a number that tells you what a loan will cost, with fees and interest, over the course of a year. This is important because it allows you to accurately compare different kinds of loans. Unlike most personal loans, which are paid back over a period of years, payday loans only have a two-week payment term, so it might seem like they’re more affordable than loans with longer terms, but that’s only true if you’re actually able to pay the loan back, with fees and interest.

(For more info about these dangerously deceptive numbers, check out our blog post “How (and Why) to Calculate the APR of a Payday Loan.”)

A study by the Consumer Finance Protection Bureau (CFPB) found that the average payday loan has an APR of almost 400 percent. And that’s a big issue, because…

2. Keep on rollin’

Another CFPB study found that over 80% of payday loans are rolled over or re-borrowed. That means the majority of these short-term, no credit check loans are being extended way beyond their two-week payment term. And the only reason someone would pay to extend a loan is because they aren’t going to be able to pay it back in time. And, unfortunately, there’s a decent chance that if you couldn’t pay off a loan in two weeks, you might struggle to pay off that loan plus a big fee two weeks after that. So payday loans get rolled over or re-borrowed over and over again, trapping the borrowers in a cycle of debt that they can’t escape from.

You can learn all the horrific details about the payday loan cycle of debt in our recent blog post.

3. Fret over debt

Speaking of a cycle of debt, that first CFPB study found that the average payday borrower takes out 10 loans per year and spends 199 out of 365 (or 366 if it’s a leap year) days in debt. In other words, they’re in debt more often than they aren’t. Obviously, there are “good” kinds of debt, like a well-maintained credit card, that can help build up your credit, but payday loans are not that kind of debt.

Unlike legitimate credit card providers, who will report your payments to the credit bureaus, payday lenders will not generally report your payments. Unless of course, you miss payments. Then your account gets turned over to collections, and collections will definitely report your lack of payment. Even in the best case scenario, these predatory bad credit loans won’t help your credit. And in the worst case scenario, it can mess it up really bad.

Read about how protect yourself from dangerous loan practices in our ebook How to Protect Yourself from Payday Loans and Predatory Lenders.

4. Day in, day out

But surely payday lenders are mainly lending to irresponsible people, right? Not at all! Although it’s nice to imagine that everyone who gets ripped off deserves it, that’s rarely the case (and deciding who “deserves” to get ripped off doesn’t sound like a good idea anyway). A Pew study found that 69% of payday borrowers use their loans to pay for everyday recurring expenses, like rent and utility bills.

Given all the other terrifying stats about payday loans, it’s clear this is not a sustainable way to live one’s life. Unfortunately, the borrowers often have no other choice. (If they have a car, they could look to title loans loans, but those still a pretty bad option. Same goes for high-interest cash advances.) The other 31 percent of payday loan users, who use their loans for one-time unexpected expenses are likely also dealing with necessities, like car repairs or medical expenses. It’s a lot of people with no other options being taken advantage.

5. The 14%

Ready for one last horrible stat? A later Pew study found that only 14% of payday borrowers can afford to repay their loan. That’s not a high percentage. It’s why so many payday loan customers are forced to roll over their loans or reborrow them. Unlike installment loans, which allow borrowers to pay their loan back in a series of smaller, more manageable payments, payday loans make you pay your entire loan back at once.

Given all the other stats we shared above, it paints a grim picture for a lot of people. Hopefully, you can use these stats as motivation to do whatever you can to avoid payday lenders, and find whatever better alternatives you can within your credit space.

Further reading and watching:

Do you have personal experience using payday loans? We want to hear from you! You can email us, or you can shoot us at tweet at @Opploans.

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How to Pay for College: A Student Loans and Scholarships Primer

How to Pay for College

Because a college education is as super important as it is stupid expensive.

For high school seniors, the leaves changing colors take on a different meaning than it has before. it used to mean stuff like homecoming, Halloween dances, and football season, now it means that college application season is underway. And as your kids start making their final decisions this fall on which schools they want to apply to, the price tag for that education will become a major, looming factor.

If you have the money to pay for your kid’s entire education out-of-pocket, then bully for you. Seriously. But for most people, that’s just not the case. For them, paying for college means taking out student loans. It won’t be just a few thousand dollars in student loans either. According to a recent study by the Consumer Financial Protection Bureau (CFPB), the number of students with $20,000 in student debt has doubled since 2002. Yowzers!

These days, the decision on how to finance their college education is one of the largest financial decisions that a young adult can make. And, in many, cases it’s also the first major financial decision they’ll make. Not a great combination, right?

Well, that’s why we’ve put together this handy-dandy primer on college costs and financing to show you how to pay for college.


How much will college really cost?

Back in the day, a person might have been able to work a job on the side or over the summer that would pay for their education, But that is no longer the case—by a long shot. In fact, over the last 20 years, the average cost of in-state tuition and fees for public universities has risen 237 percent according to U.S. News and World Report.

“It is no longer possible to work your way through college, except possibly at a community college,” says Mark Kantrowitz, Publisher and VP of Strategy for Cappex.com and a leading expert on college planning. “Students who work a full-time job are half as likely to graduate as students who work 12 hours or less per week.”

When you’re trying to figure out how much a given school is going to cost you, remember that costs aren’t just about tuition. Unless you plan on crashing on a friend’s couch, eating out of dumpsters, and reading books over your classmates’ shoulders for four whole years, you’re going to encounter additional costs.

“Use the net price when comparing college costs, says Kantrowtiz. “The net price is the difference between total college costs (tuition, fees, room, board, books, supplies, equipment, transportation and miscellaneous/personal expenses) and just the gift aid (grants, scholarships and other money that does not need to be repaid).

“Think of it as a discounted sticker price. The net price is the amount of money you will have to pay from savings, income, and loans to cover college costs.”

This is a good reminder that you won’t be able to figure out the true cost of a given school until after you’ve been accepted and have received their financial aid offer. Sure, that small liberal arts school might have a much higher tuition than the local state school, but if they are offering you more aid, the net price might be much lower.

“Don’t forget about education tax benefits, such as the American Opportunity Tax Credit (AOTC). The AOTC provides a partially refundable tax credit of up to $2,500 based on amounts you pay for tuition and textbooks,” says Kantrowtiz.

Costs will also vary, depending on your specific situation. For instance, if you are able to go to school while still living at home, that can be a great way to save. Sure, living with your parents is about as far from the “classic dorm experience” as you can get—unless your folks are super rad—but, hey, not incurring a crippling amount of debt is pretty rad as well.

Once you’ve figured out how much a school is really going to cost, then you can start figuring out how to pay for it.

Federal vs. private student loans

If you’re lucky, talented, or both, then you’re likely going to qualify for some combination of federal or state grants, work-study funds, and scholarships to pay for your college education. But, in all likelihood, it won’t be enough to cover everything. And paying for the rest is probably going to mean taking out debt.

If that’s the case, then taking out a loan from the federal government is the best way to do it.

Kantrowitz agrees. He says that “Students should borrow federal first because federal student loans are cheaper, more available and have better repayment terms than private student loans.”

How much cheaper are federal loans? Well, CNBC reported in July 2017 that the average interest rate for a private student loan was 7.81 percent for a loan with a variable rate and 9.66 percent for a fixed rate. The average rate for federal student loans? 4.45 percent.

That might not seem like much of a difference, but it is. Student loans are structured as installment loans, which means they’re paid back in a series of small, regular payments over many years. Given how long a student loan takes to pay off (usually anywhere between and 10 and 25 years says the CFPB), a few extra percentage points in annual interest can save you tens of thousands of dollars by the time your loans are fully paid back.

Additionally, subsidized federal loans come with periods during which the loan doesn’t earn interest and/or where you don’t have to make payments. Generally, if you’re enrolled in school more than half-time, you don’t have to make any payments on your federal loans.

And while the terms of private loans will vary from lender from lender, they’re usually not so great about deferring payment. Their loan terms are more like the terms you’ll find on standard personal loans. That means paying the loan back while you’re still in school!

Now, granted, federal student loans are far from perfect. You’ll still have thousands upon thousands in debt that will take you years (probably decades) to pay off. And the CFPB is currently suing Navient, the nation’s largest servicer of both federal and private student loans for “systematically and illegally failing borrowers at every stage of repayment.”

Okay, so maybe “not perfect” is a bit of an understatement.

Still, federal student loans are far preferable to private loans. They’re cheaper; they come with more flexible payment terms; and did we mention that they’re cheaper?

Types of federal student loans

There are tons of different kinds of federal student loans, most of which are for incredibly specific fields of study. But there are four types of loans that are commonly available. Odds are good that they’re the ones you (or your kid) will be dealing with.

They are…

  • Direct Subsidized Loans: Also known as “Stafford Loans,” these loans are available for undergraduate students that display a financial need for assistance. Your school determines how much you can borrow. The current interest rate for these loans is 4.45 percent. With a Subsidized Loan, the government pays the interest on the loan while you’re enrolled in school at least half-time, during the first six months after you graduate, or while you’re in a “deferment” period.
  • Direct Unsubsidized Loans: These loans are available for undergraduate, graduate, and professional degree students. (They are also called Stafford Loans.) A financial need is not required for an Unsubsidized Loan, but your school still decides how much you can borrow. The interest rate for undergraduates is 4.45 percent; the rate for graduate and professional degree students is six percent. With an unsubsidized loan, there are no periods where the government pays the interest.
  • Direct PLUS Loans: These loans are available for undergraduate, graduate, and professional degree students, as well as the parents of a financially dependent student. Whereas Stafford Loans don’t require a credit check, the borrower for a Direct PLUS Loan must not (to use the Department of Education’s phrasing) have an “adverse” credit history. The current interest rate is seven percent.
  • Federal Perkins Loans: These loans are for undergraduate, graduate, and professional degree students who demonstrate an “exceptional” financial need. The interest rate for these loans is five percent. Although Perkins Loans are federally funded, they are also issued by your school. Not all schools participate in the program, and eligibility can hinge on how much Perkins funding your school has available.

The government also offers debt consolidation loans that allow you to combine all your other federal student debt into a single loan. Consolidation loans usually come with longer repayment terms, which means a lower monthly payment; but it also means that you will pay more money over time. The interest rates for these consolidation loans are determined by a weighted average of the rates on the loans being consolidated.

(This information has been gathered from www.StudentAid.ed.gov.)

Applying for federal loans

Another point in favor of federal student loans is that the application process is a bit easier than for private student loans. All you have to do is fill out the Free Application for Federal Student Aid (FAFSA). You can access the form at www.fafsa.ed.gov.

The FAFSA is still kind of a pain though. Ask any parent or student who’s had to fill one out before. The involuntary shudder at the mere mention of the FAFSA will give an idea of what’s in store.

One of the great things about the FAFSA is that it’s used by your state and the school itself to determine what kind of aid you qualify for. And it’s not just loans either! You’ll also be applying for grants, work-study funds, and, sometimes, individual scholarships from the school itself.

Federal aid is administered through the school that the student is attending. So once you’ve filled out and submitted the FAFSA, you’ll hear back from the school to tell you how much in federal aid you’ve qualified for.

The rest will be done through the school’s financial aid office. Before you receive the money, you’ll have to take an entrance counseling course and sign a Master Promissory Note (MPN).

Kantrowitz says that parents and students should “File the FAFSA every year, even if you got nothing other than student loans last year. Subtle changes, such as the number of children enrolled in college at the same time, can have a big impact on eligibility for need-based financial aid.”

On a more general note, Kantrowitz also advises that “Students and parents have a tendency to overestimate eligibility for merit-based aid and underestimate eligibility for need-based aid.” So don’t be surprised if you qualify for more in federal funding than you originally thought!

No matter what you think about your current financial status, you should be filling out the FAFSA. There’s no argument to be had.

The problem with private loans

Private student loans should only be taken out as a last resort to finance your education. You should look to scholarships, grants, work study, federal loans, and paying costs out of pocket before you turn to a student loan from a private lender.

As we discussed earlier, the average interest rates for federal loans are much lower than the average rates for private loans. Plus, some private loans come with variable interest rates. This means that the rate can go up, increasing the amount of interest you’re accruing and the amount of money you ultimately have to repay.

The payment terms for private loans are much less flexible (and far less generous) than the payment terms for subsidized federal loans. With a private loan, you probably aren’t going to see a period where the lender is paying your interest for you—even when you’re currently enrolled in school.

And whereas you don’t have to pay back a federal loan until six months after you’ve graduated, left school, or changed to half-time status, you’ll likely have to make payments on your private loans while you (or your child) is still in school.

While federal loans are administered through your school using the FAFSA, private loans usually have to be applied for directly with the lender. (Some lenders will use your FAFSA application.) These loans might require a credit check and, in many cases, will also require a cosigner.

So if you’re the parent of a kid applying for college, your credit score could affect their chances of securing a private loan. (If the majority of the loans you take out are bad credit loans or no credit check loans, this will certainly be an issue.) Furthermore, by co-signing the loan, you are promising to pay it back if for some reason your kid isn’t able to.

Lastly, there are various ways in which federal student loans can be forgiven, i.e. the rest of your balance is written off. Private loans? Not so much.

(Read more about student loan forgiveness on the OppLoans blog.)

Any kind of loan comes with a lot of risks, but the private student loans might be a bit too risky to, well, risk it.

How much student debt is too much?

There’s a reason why student loans are considered to be “good” debt. By getting a college education, you are increasing your future earning power, which means increasing your overall wealth. Even though you’re taking on lots of debt to pay for college, what you’re really doing is making an investment in your future.

This doesn’t change the fact that this “investment” is getting paid for with debt. And, with any kind of debt, there comes a point at which you’ve taken out too much of it. An increase in your future earning power won’t seem so great if you’re filing for bankruptcy by the time you’re 30.

So how much is too much?

As with most things in life, the answer will vary. However, Kantrowitz has some great “best practices” to follow when assessing your student debt load:

“Aim to have total student loan debt at graduation less than your annual starting salary, and, ideally, a lot less. If total student loan debt is less than annual income, you should be able to repay your student loans in ten years or less.”

“Otherwise,” says Kantrowitz, “you’ll struggle to make the loan payments and will need an alternate repayment plan, like extended or income-driven repayment. These repayment plans reduce the monthly payment by stretching out the term of the loan to 20, 25 or even 30 years.

“That means you’ll still be repaying your own student loans when your children enroll in college.”

The amount of debt that’s reasonable to take on is going to depend on your future career path. There’s a reason that medical and law students are comfortable accruing a lot more debt to get their graduate degrees (even though that doesn’t always work out).

And there’s also a reason why the A.R.T. Institute at Harvard got in trouble with the federal government and has halted admissions for the next three years: An average student debt load of $78,000 for a degree in theatre arts is not at all reasonable.

Even here, Kantrowitz’s advice rings true. Higher paying careers might be worth the greater debt load, but keeping that load below your annual starting salary will leave you in good shape moving forward.

Scholarships: Get them early and often

This the best way to pay for college. Hands down.

Why? Well, the great thing about scholarships is that they are not a loan. It’s money that’s just given to you. No worries about deferment periods, variable rates, and decades-long repayment terms. You get the money, you pay for your education, and you’re done.

(Lots of scholarships are dependent on you maintaining a certain GPA average. So, you know, make sure you do that as well.)

Kantrowitz is a big fan of scholarships, and he has a bunch of great tips for how to find them, how to apply for them, and how to manage your expectations:

  • “Start searching for scholarships immediately. There are scholarships you can win in younger grades, not just during your senior year in high school or after you are enrolled in college. The sooner you start searching, the fewer deadlines you’ll miss.”
  • “When using a free scholarship matching service, answer the optional questions in addition to the required question. Students who answer the optional questions tend to match about twice as many scholarships, on average, as students who answer just the required questions. The optional questions trigger the inclusion of specific awards.”
  • “Apply to every scholarship for which you are eligible. Winning a scholarship is a matter of luck, not just skill, so the more applications you submit, the greater your chances are of winning a scholarship.”
  • “Winning scholarships is part of your plan for paying for college, not the entire plan. Only about one in eight college students has won private scholarships and the average amount is about $4,000.”

And if you’re looking to apply for a scholarship right now, you should definitely check out the OppU Achievers Scholarship.

Every year, we award $2,500 to four different students who transform opportunity into results. That’s a total of $10,000 in scholarships given out annually! To learn more—and to apply—just visit our scholarship page.

Financing your college education isn’t easy, and we hope this post was useful. Let us know what questions you still have, and we’ll get you the answers you need!

Visit OppLoans on YouTube | Facebook | Twitter | LinkedIN | Google+


Contributors
M_KantrowitzMark Kantrowitz is Publisher and VP of Strategy for Cappex.com, a free web site that helps students achieve their college dreams by connecting them with colleges and scholarships. Mark is a nationally-recognized expert on student financial aid, scholarships and student loans. His mission is to deliver practical information, advice and tools to students and their families so they can make smarter, more informed decisions about planning and paying for college. Mark is the author of four bestselling books about scholarships and financial aid and holds seven patents. He also writes extensively on student aid policy and has testified before Congress and federal/state agencies on several occasions. Mark serves on the editorial board of the Journal of Student Financial Aid, the editorial advisory board of Bottom Line/Personal, and is a member of the board of trustees of the Center for Excellence in Education.

The Eight Best Online Loan Calculators

Best Online Loan Calculators

There are a lot of great loan calculators online. We did the research and brought you back our favorites.

Applying for any kind of loan—sadly—means doing a lot of math. You have to do stuff like calculate annual percentage rates (APRs) and figure out how your monthly payment will be affected by the length of your repayment term. With some loans, you even have to factor in taxes and insurance.

Heck, getting answers on your student loan payments might as well require you to go to school to figure it out—which would then mean taking out yet another student loan to pay for it!

(We’re joking about that last one. But only slightly.)

However, just because you have to do some math, doesn’t mean you have to do it all on your own. There are lots of great loan calculators available online that ask for your basic loan info and then do the hard part (read: the math part) for you.

This is why we combed through a ton of online offerings before settling on the best, most usable loan calculators that we could find.

Here’s what we recommend.


1. Personal Loan Calculator – Bankrate.com

Bankrate.com (@Bankrate) is a great website that lets you compare rates on a whole bunch of different loans, credit cards, and other financial products. And to help you do that, they offer a sleek, simple loan calculator that’s a cinch to use. It can be used for any kind of loan, including mortgages and auto loans, but there are lots of auto and mortgage specific calculators out there that offer more specific features.

We recommend using this one for standard personal loans. The pie-chart feature that shows how much you’ll pay in interest versus the rest of your balance is a lovely touch.

2. Auto Loan Calculator – Cars.com

I know. You’re absolutely shocked that a site like Cars.com (@carsdotcom) would offer one of the best auto loan calculators. We know. We’re surprised too. In all seriousness, though, this is a great calculator that includes lots of car-specific data points. For instance, when you’re buying a car, you’re probably going to get hit with sales tax. So this calculator lets you enter that tax rate in, giving you a full picture of how much you’re paying. It even has a feature where you can estimate and factor in the value of your trade-in.

Nobody likes being hit with surprise fees and taxes, so the Cars.com calculator makes sure you get as clear a snapshot as you can before actually applying.

3. Mortgage Loan Calculator – Zillow.com

If you’ve spent any amount of time shopping for a house, apartment, or condo, then you’re probably familiar with Zillow.com (@zillow), one of the leading real estate listing sites. To help prospective homebuyers, they’ve created a mortgage loan calculator that gives you a lot of information—without getting busy or hard to use.

There’s a basic version of the calculator where you can enter cost, down payment, APR, and term-length to get a broad overview of your loan, and then a more advanced version where you can enter in property tax, home insurance, and HOA dues. The calculator is geared around your expected monthly payment, which it breaks down into its various parts, letting you see how much you’re paying each month in principal and interest, taxes, insurance, and HOA fees. The calculator not only provides you a full amortization schedule as well, it even pops that information into a handy-dandy graph!

4. & 5. Debt Snowball/Avalanche Calculators – Undebt.It & Unbury.Me

When you’re making a plan to pay down your existing debt, you’re probably choosing one of two methods. Either you’re focusing on paying off the debt with the lowest balance first, also known as the “Debt Snowball” method, or you’re making your highest-interest debts your top priority, better known as the “Debt Avalanche” method.

No matter which method you choose, you’re going to need a calculator to help you make a plan of attack. Luckily, there are actually two really great calculators out there that will help you with both methods. They’re offered by Undebt.It (@undebt_it) and Unbury.Me (@unburyme). Neither calculator is super fancy because they don’t need to be. They walk you through the debt organization process and give you a clear picture of how long it will take you to become debt free, how much you’ll be paying each month, and how much you’ll pay in interest along the way.

If you want to learn more about the debt snowball and debt avalanche methods, you can check out our blog posts:

6. Federal Student Loan Calculator – StudentLoans.Gov 

If you have federal student loans, then why not use the federal government’s loan calculator to help you repay them? The best part about their calculator is that you can log into the StudentLoans.gov (@FAFSA) website and it can instantly access all the info for your outstanding loans. No more typing all of your info into the fields. It also gives you payment plans, estimates, and projected loan forgiveness based on what type of repayment plan you’ve selected or are eligible for.

To learn more about student loan forgiveness, check out our blog post:

7. Private Student Loan Calculator – StudentLoanHero.com

If you have a mixture of private and public loans, then we recommend checking out the calculators offered by StudentLoanHero.com (@StudentLoanHero), a website created to help people organize, manage, and repay their student debt. They have 20 different calculators, most of which are designed for different aspects of student debt, both private and public, including calculators that will help you with consolidation and refinancing.

To learn more about student loan consolidation, check out our blog post:

8. Payday Loan Calculator – CSGNetwork.com

Before taking out a payday loan, you should know what you’re getting yourself into. Because, while the interest rates for these short-term, no credit check loans might seem reasonable, their APRs show you just how expensive they are compared to other types of loans. That’s why, when you’re considering taking out a payday loan, you should always check the APR first. But don’t worry, all you need is the principal amount you’re borrowing, the length of your repayment term, and the interest charge, which might be referred to as a “loan fee”. (Unlike other loans, payday loans are designed to be paid back in a single, lump-sum payment, which means that interest is often charged as a flat fee, rather than an ongoing rate.)

Once you have that information, you can visit this payday loan APR calculator provided by CSGNetwork.com. The calculator might not look like much, but it’ll get your APR calculated lickety-split. And once you see how expensive your loan is, you might consider looking for something a little more affordable. Might we suggest an installment loan from OppLoans?

Do you have an online loan calculator that you like to use? Let us know! You can email us, or you can shoot us at tweet at @Opploans.

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Is Guaranteed Approval A Real Thing?

Guaranteed Approval For No Credit Check Loans

In short: no. That’s why promises of “guaranteed approval” are a huge danger sign.

If you have bad credit, then your lending options are going to be tight. A credit score under 630 means that most traditional lenders are not going to work with you. Furthermore, applying for a loan from a bank or credit union could end up knocking your score even lower!

That’s why folks with bad credit often turn to no credit check lenders. These are lenders who, as you might have guessed, will not check your credit score before issuing you a loan. For someone who has bad credit, a no credit check loan sounds like just the ticket!

But if you see a lender that is advertising “guaranteed approval” for their no credit check loans, you should be careful; because “guaranteed approval” is not a real thing. And promises like this are a hallmark of predatory lenders that want to trap you in an unending cycle of debt.

Let’s break this down, shall we?


What is guaranteed approval?

Let’s not beat around the bush. Guaranteed approval is a myth.

Theoretically, guaranteed approval means that, no matter how bad your financial circumstances are, this company will lend you money if you apply for it.

The problem here is that just isn’t so. A lender that gave out loans to anyone who applied for one would not be in business very long. All lenders have some kind of minimum standards that potential customers have to meet.

Of course, the standard for some lenders is very low. Oftentimes, all you need to apply for a loan from them is a functioning bank account. This is usually true for payday lenders, who use a postdated check to “secure” your loan. So long as you have an account and a pulse, they’ll gladly lend you money.

But if you’re a member of one of the nine million US households that don’t have a bank account (known as “the unbanked”), then you still wouldn’t be able to get a loan from these folks.

Easy approval? Sure. Guaranteed approval? Nope!

Promising “guaranteed approval” is a danger sign.

The reason that predatory no credit check lenders advertise “guaranteed approval” is simple. It gets your attention, and it gets you to click on their ad or walk into their storefront.

Advertising “guaranteed approval” is no different than those click bait internet articles that end with “and you won’t believe what happened next.” It’s a tactic to get your attention and to get you in the door.

Lenders like these know that their potential customers have bad credit scores, low levels of financial literacy, and are usually in desperate need of some fast cash. They also know that once the person has clicked on their site or entered their store, they’re pretty likely to walk out with a loan.

So these lenders make big flashy promises (often times with an asterisk and some very fine print attached) that they have no intention of keeping. And while it’s true that these sorts of lenders will probably approve your loan application, it’s also a sign that they do not care about your ability to pay the loan back.

And a lender that doesn’t care about you paying your loan back is likely one whose products will trap you in a dangerous cycle of debt.

Avoiding the debt trap: Why “ability to repay” is so important.

Most of the time, a promise of “guaranteed approval” is going to come from a payday lender. These are lenders that offer short-term, no credit check loans, usually requiring nothing more than a postdated check made out to them for the amount loaned plus interest.

But isn’t that the great thing about these payday lenders? It’s so easy to get a loan from them! They wouldn’t want to give you a loan that you couldn’t afford to pay back…

Except that’s exactly what they do.

See, predatory payday lenders depend on your inability to afford the loan in the first place. Instead, they want you to either roll your loan over or pay it back and then immediately take out a new one–also known as “reborrowing.”

Either way, people end up taking out loan after loan, each time paying more and more money in interest, and never getting any closer to paying down the principal. It’s a vicious cycle of debt, with no end in sight.

And it’s also the backbone of the payday lending industry. According to a study from the Consumer Financial Protection Bureau, 75 percent of payday loan fees come from borrowers who take 10 or more payday loans in a single 12-month period.

Predatory lenders like these prey on people with bad credit scores who don’t have many other options. It’s not that they ignore a person’s ability to repay, it’s that people who flat out can’t afford these loans make for their best, most profitable customers.

Thes are the kinds of lenders that like to advertise with promises of “guaranteed approval.”

Skip no credit check loans. Try a soft credit check loan instead.

The fact of the matter is this: when you are applying for a no credit check loan, you are running a very high risk of encountering a predatory lender.

The reason for that is simple. People with bad credit who can’t afford a regular loan (or who don’t have the savings built up to deal with a financial emergency) are predatory lenders’ prime targets.

They lack other credit options beyond bad credit loans. They likely have low incomes, as well as a low level of financial literacy. They are exactly the kinds of people who can easily get trapped into a dangerous (but very profitable) cycle of debt.

But there’s another, better option out there. While a no credit check lender probably doesn’t care about your ability to repay, you can be certain that a “soft” credit check lender does.

What’s a soft credit check lender? Well, they’re a lender who does look at your credit history to see whether or not you can afford your loan.

Here’s the best part: a soft credit check won’t affect your credit. Soft checks, like the kind you make when you check your credit score, don’t show up on your credit report. Read more about soft credit checks in our post 5 Must-Know’s Before Applying for a “No Credit Check” Loan.

Sure, caring about your ability to repay does mean that a soft credit check lender is a little more likely to reject your application, but that’s the beauty of a soft credit check. You can apply for a loan without any fear that a rejected application will needlessly harm your score.

We should know. OppLoans performs a soft credit check on every application we receive.

So what are you waiting for?

Learn more about OppLoans, or apply for a loan today. And if you’ve had a bad experience with a no credit check lender, we want to hear from you! You can shoot us an email by clicking here or you can find us on Twitter at @OppLoans.

Visit OppLoans on YouTube | Facebook | Twitter | LinkedIN | Google+

Know Money, Win Money! Episode Two: Payday Loans

opploans - know money, win money

Hello, money fans! It’s time for the newest episode of Know Money, Win Money!

We quizzed people about payday loans and gave them money when they got it right. Hopefully they didn’t have to spend that money paying off a payday loan, but if they did, then fingers crossed that was the last bit they needed to pay it off!

You can watch the episode below:

The first question we asked was about the average payment term for a payday loan. That is, how long you have to pay back the full loan amount with all fees and interest included. The answer? Only two weeks. Which means a lot of people are forced to…

Rollover their loan. We asked people what that means, and some of them knew! In case you don’t know, it means that you pay to extend the loan, which can be the start of a vicious cycle of debt. You can learn more about Payday Loan Rollover (an its many, many dangers) here in our blog.

Next we told people that payday loans have an average of 400% APR and asked what APR stands for. It’s Annual Percentage Rate, and it’s a number that describes the full cost of a loan including all interest and fees. That lets you compare different loans in an “apples to apples” fashion to figure out which one makes the most sense for your needs.

Finally, we asked how installment loans are different from payday loans. As the name suggests, installment loans allow you to pay off the loan over time, in installments, so you can manage your finances without falling behind.

All right, now that you know about payday loans, don’t go get one! But do get money when you run into us the next time we’re on the street playing Know Money, Win Money!

Be sure to also check out our previous Know Money, Win Money blog and episode about credit.

What are some financial topics that you’d like us to cover in future episodes of Know Money, Win Money? We want to hear from you! You can email us by clicking here or you can find us on Twitter at @OppLoans.

Visit OppLoans on YouTube | Facebook | Twitter | LinkedIN | Google+

Introducing How to Money! Episode One: APR

how to money video

Hey readers, we’ve got some exciting news! We at the OppLoans Financial Sense blog are launching an ongoing video series called “How to Money.” Every episode we’ll tackle a different financial topic. Some of them will be terms you hear every day, while some of them will be a bit more obscure.

Each week, we’ll boil our topic down to its basics and include some helpful tips for how you use your newfound knowledge to live a healthier financial lifestyle. If you’re on the go, these videos will be the perfect way to brush up on your financial know-how.

We’ll be releasing one video a week until, well, until we either run out of financial topics or the sun swells into a gas giant and consumes the planet—whichever comes first.

(Basically, we’re in it for long haul.)

Enjoy!

What is APR?

If you’ve ever seen a car commercial or gotten a credit card offer in the mail, then you’ve probably heard of APR. But what is it?

Well, it’s an acronym, and it stands for Annual Percentage Rate. Basically, it tells you how much a given loan or credit card is going to cost you over the course of one year.

APR is a better measure of a loan’s true cost than the simple interest rate because it includes additional fees and charges—something the simple interest rate conveniently leaves out. (You can read more about that in our What You Should Know About Interest Rates blog post.)

Here’s how APR works.

Using the APR, you can figure out how much money you’ll be paying in order to borrow money.

Let’s say you take out a multi-year installment loan for $1,000 with an APR of 15 percent. After one year, you would owe interest equal to 15 percent of the total amount borrowed. In this case, that would mean 15 percent of $1,000, or $150.

So with an APR of 15 percent, you would owe $150 in interest on a $1,000 installment loan after one year.

Here’s where it gets tricky.

Yeah, this is the section where APR gets slightly more complicated. Since APR is calculated off your total remaining balance, the dollar amount that accrues over time decreases, even as the rate stays the same.

Wait, what?

Think about it like this: Using the previous example, your APR stays the same at 15 percent, but as you pay the loan down you’re getting charged 15 percent of an ever smaller and smaller balance. If you paid off half of your $1,000 loan, your 15 percent APR would be applying towards a balance of $500, and 15 percent of $500 is only $75.

So what does this mean?

This is actually good for you. As you pay your loan off, the amount of interest that’s accruing goes down too, so you end paying less in interest overall. Less money paid in interest is good! Woohoo!

Using APR for short-term loans…

One of the reasons that APR is such a useful tool is that it lets you compare costs between different loans. And when it comes to short-term loans like payday loans—which oftentimes only last two weeks—APR can show you just how insanely expensive these products are compared to other loans.

Let’s look at the APR for a 2-week payday loan. Let’s say that the loan is for $300 with an interest rate of 20 percent. 20 percent doesn’t sound that bad right?

But, remember, that 20 percent interest rate only applies for the loan’s two week term. If you were to roll the loan over, you’d be charged an additional 20 percent, for a total interest rate of 40 percent over four weeks.

In order to figure out the APR, you have to figure out how much that interest rate would be over an entire year!

There are 52 weeks in a year, and 52 divided by two is 26. So if you multiply 20 by 26, you’d get the APR for your two-week payday loan

It’s 520 percent.

Yowza! This is why payday loans are so much more expensive than your standard installment loan. The interest rates look comparable, but APR tells you the real story.

Is there is a topic that you would like for us to cover in a future episode of How To Money? Let us know! You can email us by clicking here or you can find us on Twitter at @OppLoans.

How to Avoid Bad Credit Loan Scams

Bad Credit Loan Scams

Having bad credit means you’re going to have a tough time getting a good loan. Many banks won’t even let you in the doors. Well, they’ll probably let you into the doors, and they may even let you use their restroom, but they’re not going to give you a loan.

Unless you have family who can help in the event of an emergency, you’ll have to turn to a bad credit loan. And that’s where many scammers come in. They know your options are limited and they’re shameless enough to take advantage of your desperation. That’s why you have to be always vigilant so you can get the best loan possible without getting ripped off.


Make sure they want to see your credit history.

Even if a lender is willing to loan to people with bad credit (or no credit) they should still be interested in seeing your credit score. It’s a bit suspicious if they aren’t at least curious about your past spending habits. As nationally recognized credit expert Jeanne Kelly (@creditscoop) told us: “Any company that says it doesn’t care about your credit history should be a warning sign. All credible lenders disclose that they will pull your credit report.”

Be aware, however, that not all credit checks are created equal. There are both hard and soft credit checks. A hard credit check will show up on your credit report and can actually make your bad credit even worse. A soft credit check will not show up on your credit report.

It’s a reassuring sign that a potential lender wants to perform a credit check, but you should try and find one who will perform a soft credit check, if at all possible.

A credible bad credit lender should also look for other proof of your ability to pay back the loan, whether it’s checking your bank account or requiring proof of income. Since most lenders use a good credit score as an indication that you’re going to pay back the loan, it’s suspicious if they’re still willing to lend to a person with a bad credit score and no other indication that the loan will be paid back.

Check those reviews.

Like any restaurant, museum, or spa, you want to check multiple online review sites before choosing a lender. Certified financial educator Maggie Germano (@MaggieGermano) emphasized the importance of performing your due diligence: “If you are being approached by a lender, be wary. You’ll want to do research and make sure they’re legitimate. Google the company or person’s name and see what comes up. Be especially on the lookout for complaints or bad reviews.”

Remember to check a wide range of reviews across Google, Facebook, the Better Business Bureau, and sites that specialize in lending reviews. Some scam lenders might try to fake reviews on one or two sites, but if their reviews are consistent across many different internet locations, there’s a better chance the perception reflects reality.

Customer service is a must.

A good lender shouldn’t be trying to hide anything from you. They should have a number you can easily call to have all of your questions answered. If they aren’t willing to give you as much time as you need to feel comfortable, then they don’t deserve your business. And don’t settle for some robot, either. You should be able to talk to a person. The robots haven’t taken over yet!

Any lender who tries to rush you into a decision should be treated with suspicion. If they’re really offering the best loan for your situation, they’d be willing to let you find out what your options are and be certain of your choice.

Look out for their location.

Different states have different lending laws, and you should familiarize yourself with them. Additionally, you should do some research and find out where the lender is located. If they’re located offshore or in First Nations territory, they may not be subject to the usual regulations, and you’re better off finding another lender.

Look out for those fees!

There are legitimate lenders who charge a fee to process your loan, but no lender should be making you pay a fee before you’re approved. According to Sally Elizabeth of Peopleclaim.com (@Peopleclaim): “Scammers will come up with any number of creative excuses for why you need to send them money and more money for that ‘pre-approved loan-insurance,’ the first month’s payment, good-faith payments, getting rid of an unfavorable item on your credit report… you name it. Demands will escalate until you realize you’re being scammed and you’ve lost as much as $2,000.”

A good lender will be willing to tell you EXACTLY how much you’ll have to pay in fees and interest once you’ve been approved, and won’t spring any surprise fees on you.

It’s hard trying to find the best loan possible when you have bad credit, and predatory scam lenders (like payday lenders) don’t make it any better. But by keeping these tips in mind and maintaining the proper skepticism and caution, you’ll be able to get the ideal loan for your situation.

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Contributors
Sally Elizabeth works for online dispute resolution platform PeopleClaim.com, helping people who are normally shut out of the legal system because of time or money. Weeding scams out from common consumer complaints has taught her way more about scammers than she ever wanted to know.
Maggie Germano is a Certified Financial Education Instructor and financial coach for women. Her mission is to give women the support and tools that they need to take control of their money, break the taboo of discussing debt and income, and achieve their goals and dreams. She does this through one-on-one financial coaching, monthly Money Circle gatherings, her weekly Money Monday newsletter, and speaking engagements. To learn more, or to schedule a free discovery call, visit MaggieGermano.com.
Jeanne Kelly is an author, speaker, and coach who educates people achieve a higher credit score and understand credit reporting. #HealthyCredit is her motto. As the founder of The Kelly Group in 2000 and the author of The 90-Day Credit Challenge, Jeanne Kelly is a nationally recognized authority on credit consulting and credit score improvement.

How to Stay Safe With a Bad Credit Loan

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Have you seen all those stories recently about turkeys flying into people’s windshields? Yeah, we know, they’re really weird. But they also raise the question: what would you do if something like that happened to you? Would you be able to afford the car repairs (or your subsequent psychologist’s bills)?
If you’re one of the 6 out of 10 Americans who have less than $500 in savings, then the answer is: probably not. In that case, the odds are good that you’ll have to take out a loan to pay for the repairs. And if your credit isn’t so hot, you’ll likely be turning to a loan from a bad credit lender.

While your interest rates with a bad credit loan are almost always going to be higher than they would with good credit, these loans can still make a ton of financial sense if you’re in a pinch. The key is making sure you stay safe and avoid the predatory bad credit lenders that want to trap you in an unending cycle of debt.

Taking out a bad credit loan from the wrong lender could leave you feeling like a real turkey.

1. Research your options ahead of time.

Your chances of avoiding a predatory bad credit lender are better if you do your research before applying for a loan. And they’re much better if you do your research before you’re in a bind and pressed for time.

While researching potential lenders, check out their ratings and reviews from the Better Business Bureau to see if they’ve been accused of shady dealings in the past. You can also check with your local consumer protection agency to see if any complaints have been filed against them.

And don’t forget user review sites either! Head on over to GoogleFacebook, and LendingTree. If customers have had a bad experience or been subjected to misleading terms when signing up for a loan with this lender, they’ll let you know!

The Home Economist blogger and author Brett Graff (@BrettGraff) warns that you should “Be wary of a lender that’s not interested in your credit history, one that offers loans over the phone, or a lender using a name that sounds like a reputable bank. Many scammers do that to sound reputable but aren’t. Don’t deal with a lender who asks you to wire money or pay an individual. Stay safe by making sure the company has a physical address and check the phone number against the one online.”

Doing your research ahead of time will allow you to be thorough and methodical. Rather than just rushing through the first page of Google results for “Bad Credit Lender,” you’ll be able to calmly judge which lender is the best one for you.

You’ll want to make sure that you also compare rates between different lenders. Which brings us to #2 on our list …

2. Do the math!

A lot of bad credit lenders fall under the category of “payday loans.” This means that they offer short loans, ones that are usually meant to be paid back in only two weeks. The interest rates for these loans can seem pretty reasonable. Oftentimes it’s something along the lines of “$15 to $20 per $100 borrowed.”

But dig a little deeper and you’ll find that many of these loans are dangerously expensive compared to your other options. You see, these loans may only charge 15 or 20 percent, but that’s 15 or 20 percent over a short two-week span.

Many payday loan customers have trouble paying these loans off when they come due (that’s the downside of short repayment terms) and so they end up “rolling the loan over.” or extending the due date in return for an additional interest charge. Every time they do that, the cost of borrowing increases.

Measure payday loans according to their annual percentage rate, or APR, and you’ll see just how expensive they really are. A two-week payday loan with an interest rate of 15 percent has an APR of 390 percent! Yowzers!

3. Only borrow what you can afford.

If you are unable to make your payment with a payday loan, then you might be given the option of rolling the loan over. If loan rollover is illegal in your state (it’s banned in many places as a predatory practice), or if you’ve reached your rollover limit, you might also be forced to “reborrow” the loan.

Reborrowing means that you pay the loan off using money that you really need to use for other things, like utilities, car payments, or even rent. In order to make those other payments, you then take out a new loan almost immediately after paying the old one off.

Reborrowing and loan rollover are the twin engines that keep the payday debt cycle chugging along. Borrowers are constantly taking out new loans or extending old ones, putting more and more towards interest without ever being able to get ahead.

And, of course, the consequences of not paying back a loan are also pretty nasty. First, you’ll get sent to collections, which means your credit score will take a hit. Even if the lender didn’t check your score when you applied for the loan and doesn’t report your payments to the credit bureaus, the collections agency will inform the bureaus when they take over your account. It’s pretty much a lose-lose.

(Debt collections agencies have a pretty nasty reputation and there are lots of stories out there about debt collectors acting abusively. To learn more about your rights when dealing with a debt collector, check out our blog post: What Debt Collectors Can and Can’t Do.)

If you are still unable to repay your loan, the collection agency will likely take you to court. If the ruling goes in their favor, then they are able to garnish your wages until the debt is fully paid off.

Bottom line: Before you take out a loan, be certain that you can actually afford to make your payments.

Make the lender explain—in as much detail as possible—what your payment schedule will be. And keep in mind that payday loans are designed to be repaid all at once and ask yourself: if you need a $400 loan right now, do you think you’ll really be able to afford a $480 payment ($400 plus 20 percent interest) after only two weeks?

You’ll probably be better off choosing a long-term installment loan. Sure, you won’t get out of debt as fast, but you’ll pay the loan off in series of smaller, regularly scheduled payments. Plus, most of these loans are amortizing, which (long story short) means that you’ll be paying less in interest over time.

A loan is supposed to help you get your finances together. What’s the point of a loan that leaves you worse off than you were before you borrowed it?

Speaking of which …

4. Find a loan that actually helps your credit!

As we mentioned earlier, tons of bad credit lenders out there don’t report your payments to the credit bureaus. While that might not mean a whole lot to you, it’s actually kind of a big deal.

“Your payment history is the most important factor in the consideration of your credit score,” says Kerri Moriarty, one of the founders of Cinch Financial (@CinchFinancial). “The more months you can demonstrate good payment, the faster that bad month (or months) will move off your credit report. It also gives creditors more to evaluate. Let’s say you were using a credit card and missed a payment; creditors can see you missed a single payment in months and months of payments as opposed to seeing that you missed a payment and haven’t used the card since.”

But here’s the thing, if a bad credit lender isn’t reporting your payments to the credit bureaus, then you’re not getting any credit for those payments. Sure, you should be paying them on time anyway, but still, it would be nice to get credit on your credit!

5. Focus on improving your credit score!

Really though, the best way to stay safe with a bad credit loan is to qualify for a loan with better rates!

We already mentioned the importance of making your payments on time. But there are other things you can do to improve your credit as well.

For instance, Moriarty recommends getting a secured credit card: “A secured card requires you to put down a deposit in cash in order to receive the line of credit. It’s basically the creditor’s way of ensuring that there is at least something they will get back in the event that you fail to pay.

She says that “Using a secured card for a few months to a few years lets you demonstrate good credit behavior while the company has no risk. After a while, the card company is likely to offer to upgrade you off of the secured card to the standard, unsecured card—returning your deposit, and graduating you to a rewards card.”

Moriarty also recommends that folks looking to raise their credit score “Make it a point to keep an eye on their utilization. In consideration of your credit score, creditors look at how much of your available credit limit you’re using at any given time— anything around 15% to 30% is pretty good. When you’re using more than 30%, creditors tend to get a little nervous.

“In your rebuilding time, it’s worth keeping a close eye to keeping everything under that 30% line each month,” says Moriarty. “It shows you’re responsibly managing the amount that’s been extended to you – and could even handle more in the future!

Want to learn more? Then check out our recent blog post: 15 Tips for Improving Bad Credit.


Contributors

Brett Graff (@BrettGraff) has been seen writing and reporting on money and personal finance in The LA Times, Yahoo! Finance, Cosmopolitan, The New York Times and the Fiscal Policy Institute, to name a few. Brett also provides her insight in the column, The Home Economist, which is nationally syndicated and published in newspapers all over the country. Her book “NOT BUYING IT: Raising Happier, Healthier & More Successful Kids” is now available!

Kerri Moriarty is part of the founding team at Cinch Financial (@CinchFinancial), a Boston-based startup building autonomous fiduciary software. Prior to Cinch, she worked as a financial advisor helping individuals plan their financial lives in the long and short term. Being one of those mysterious millennials, she manages most of her life across 5-6 apps on her phone and recognizes no such technology exists for her everyday financial decisions. Big companies have CFO’s working for them – why shouldn’t you? That’s where Cinch comes in.