How Is a Live Check Different from a Payday Loan?

Inside Subprime: Feb 5, 2019

By Lindsay Frankel

Make no mistake: that authentic-looking check you received in the mail is not free money. It’s likely a live check, which is a pre-approved loan offer. These frequently pop up around peak times of consumer spending. If you cash the check, you’ll be automatically entered into a loan agreement that could have a steep annual interest rate.

Like payday loans, live checks are considered predatory because they carry much higher interest rates than traditional forms of credit. In addition, lenders do not consider a borrower’s income or ability to pay back the loan. Live checks are also unsolicited, often tempting people to borrow money for unnecessary expenses such as holiday gifts.

Carolyn Carter, deputy director at the National Consumer Law Center, said live checks can be an unaffordable method of borrowing. “Pushing credit on people when they haven’t actually asked for it can easily lead them to being overextended,” she said.

New legislation was introduced December 10 that would stop the practice of mailing live checks altogether. U.S. senators Doug Jones (D-Ala.), Tom Cotton (R-Ark.), and Jeff Merkley (D-Ore.) introduced the Unsolicited Loan Act of 2018, which they hope to see move forward this year. It would prevent the extension of credit to consumers who didn’t apply for a loan.

Unlike payday loans, live checks are typically sent to creditworthy consumers. Payday loans are offered without a credit check, which makes them appealing to borrowers with bad credit, while live checks are only offered to customers who meet certain criteria set by the lender. And while live checks often have annual interest rates that exceed 25 percent, the average payday loan is even more expensive, with annual interest rates of almost 400 percent.

If you get a live check in the mail, you should research the lender before cashing the check. Make sure the lender is licensed and check for any complaints in the CFPB’s Consumer Complaint Database. Next, read the loan terms carefully and assess whether the loan is affordable for you personally. The agreement should express the annual interest rate for the loan, which you can compare to different loan offerings. Try talking to local banks and credit unions or researching online lenders to see if you can get a better rate.

Ultimately, a detailed budget and savings plan will be your best defense against needing to borrow money. And if you don’t need to borrow money, be sure to shred that live check you got in the mail to avoid becoming a victim of check fraud. Live checks carry a significant risk of identity theft, as documented by consumer complaints to the CFPB.

For more information on payday loans, scams, and cash advances and check out our city and state financial guides including Indiana, Illinois, Ohio, Kentucky and more.