Avoiding Debt Traps: Pay Day Loans, Rapid Refunds & Co-Signing

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Virtually everyone is living with some form of debt today. Quite honestly, living 100% debt-free is nearly impossible, and in fact, some debt is necessary and is highly likely to pay off in the long run. Some examples of good and ‘healthy’ liabilities include student loans, (they will enable you to make more money in the not so distant future), car loans (they will enable you to have transportation to and from that job that your college degree helped you land). The truth of the matter is that, if you’re living in middle class America, borrowing capital as an investment in a better future is definitely not a bad thing.

However, if you’re not talking about getting an education, investing in your own company or getting approved for a home or auto loan, you may very well be taking on problematic debt that you should steer clear of at all costs. Instead of leading you toward a better life and financial comfort, these forms of indebtedness will slowly weigh you down with payments you cannot handle, potentially snowballing until you’re dealing with a veritable debt crisis.

Do your best to avoid the following situations at all costs:

Pay Day Loans – Essentially ‘cash advances’, these short term loans are unsecured and have insanely high interest rates – ranging from 100% to 650%. In order to be granted a pay day loan, you only need to provide proof of employment. The idea is that you’ll pay the lender back what you borrowed (plus a ton of interest) the next time you get paid. Generally considered a last resort, people who get pay day loans do so to avoid the embarrassment of turning to friends or family for financial assistance, or to avoid downsizing and living within their means. Although pay day loans may seem like a good short term option, the majority of pay day loan borrowers can’t afford to pay back the money right away, meaning sheer financial disaster. If the borrower fails to repay the loan in full, s/he gets slammed hard with those high interest rates mentioned above. Within five months, a pay day loan can rack up $500+ in interest charges alone.

Co-signed Loans – The only people you should ever consider co-signing a loan for should be your spouse or your grown children. Otherwise, we have four words of advice for you: “Just don’t do it!” Putting your John Hancock onto a significant loan document does not benefit you, aside from feeling good about yourself for helping someone out. It’s important to remember, though, that by co-signing on a loan, you are 100% responsible for repaying the borrowed money if the primary borrower defaults on the loan, for any reason. Trying to find a positive reason to co-sign is difficult, because even if the primary borrower makes all the payments on time, it does very little to raise your credit score. High risk with slim benefits. Just say “No!”

Refund Anticipation Loans/Rapid Refunds – It’s true that recent legislation now prevents banks and other tax preparation companies from enticing consumers with ‘rapid refunds’, because of the exorbitant amount of money people were losing due to steep interest rates.

However, be aware that tax professionals, who are now losing money due to that new legislation, have found ways to bend the rules.

With so many Americans literally living paycheck to paycheck and counting on that tax refund, the faster they can get their tax money in their hands, the better. Desperation to pay rent or buy food for a family means people will take the money and run, without much more than a glance at the fine print:

  • Refund anticipation checks (very short loans of the fees charged by the tax preparer) mean that the preparer “loans” the fee s/he would normally charge for tax services, agreeing to take their payment out of the refund when it arrives. While saving consumers money up front, this type of loan once again comes laden with tremendous fees that the preparer then gets to pocket.
  • Personal lines of credit – Some of the bigger tax preparation companies have started offering these, taking extreme care not to make any mention of the loan relating to the consumer’s tax refund. They claim that these ‘personal loans’ are extended based solely on a good credit score, not on a big tax refund in someone’s near future.

The mere fact that tax preparation companies are offering loans is something to scratch your head over, though, and for good reason. With high monthly fees of up to $9.99, interest rates of 35%+, fees starting at $35 for late or missed payments, and $10 just to move the money from its original location (offered by the tax company), to your own bank account,

Naturally, there are exceptions to every rule, but consider yourself forewarned about the high financial risks associated with pay day loans, alternatives to rapid tax refunds, and co-signing on a loan for a friend. And please, should you so much as think about engaging in one of the above situations, please give our office a call first and run through the details with us.

Be sure to read our other posts in this series about debt traps – on the topic of excessive student loans, renting to own, financing assets that are depreciating, and borrowing from your pension.

 

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3 Responses to Avoiding Debt Traps: Pay Day Loans, Rapid Refunds & Co-Signing

  1. Pingback: 10 Surprising Ways You Could be Destroying Your Credit | Veitengruber Law

  2. Pingback: Can Gambling Debts be Discharged in Bankruptcy? | Veitengruber Law

  3. Pingback: Do My Brother’s Creditors Have a Claim to My Inheritance? | Veitengruber Law

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