For the millions of Americans who struggle to afford an unexpected expense, high-interest payday and online loans may seem like acceptable options despite the inherent risk.
But guidance issued by federal regulators in the spring could bring a competitor to small-dollar lending: banks. The guidance omits a previous suggestion from the Federal Deposit Insurance Corp. that loans from banks should have annual percentage rates of 36 percent or lower.
While some consumer advocates say a rate cap is a necessary consumer protection, researchers say banks can check a borrower’s credit and offer affordable loans — something payday lenders whose APRs often reach above 300 percent typically don’t do.
If your only option is a high-interest loan, no matter the source, take control by understanding the rate and monthly payments and choosing a lender that checks your ability to repay.
Understand your rate to calculate payment
There is no federal interest rate cap on small loans of a couple thousand dollars or less, and bank regulators can’t impose one. But 45 states cap APRs on $500 loans, while 42 states have caps on $2,000 loans. Check the National Consumer Law Center’s fact sheet to see the APR cap in your state.
The NCLC advocates for a federal 36 percent rate cap. Associate Director Lauren Saunders said without one, high rates could permeate other credit products. Many lenders that offer APRs of 36 percent or lower tie your rate to how risky it is to lend to you, based on your credit history. If you’ve had trouble making loan or credit card payments in the past, the lender may see you as a high-risk borrower and assign a rate close to 36 percent.
APRs are useful for comparing loan products, but seeing dollar amounts can help consumers evaluate whether they can make the required payments on an installment loan, said Alex Horowitz, senior research officer with The Pew Charitable Trusts.
If the only loan you can qualify for has a rate higher than 36 percent, calculating the monthly payments can help you understand what you can afford. A bank would have to charge $50 to $60 on a $400 loan repaid over three months to make it profitable, Horowitz said. That’s an APR of 75 percent to 90 percent. A 2017 study from Pew found many consumers think that’s a fair rate.
Small-dollar lending is currently dominated by online lenders, said Leonard Chanin, deputy to the chairman at the FDIC.
But U.S. Bank’s “Simple Loan” offers a rare example. The loan usually has an APR of about 71 percent. Borrowers with autopay pay a $12 fee for every $100 borrowed and repay the loan over three months.
Chicago-based online lender OppLoans provides loans to borrowers with bad credit and has APRs as high as 160 percent in some states. CEO Jared Kaplan said it’s costlier for his company to acquire and underwrite customers, which leads to higher rates.
“Whether (your APR is) at 79, 99 or 160, you’re dealing with a risky customer base and the price should justify that risk,” he said.
Choose a credit lender that checks your financial data
Lenders that don’t determine your ability to repay using information like your income, existing debts and credit information tend to offer high-interest loans with short repayment periods, making them difficult to pay off and trapping you in a cycle of debt.
Banks and other lenders that can access your bank account information and payment history can determine whether you can afford the loan.
Applicants for the Simple Loan must have a checking account for six months and have direct deposits sent to the account for three months before they can apply, said Mike Shepard, U.S. Bank’s senior vice president in consumer lending.
That ability to underwrite an existing customer, rather than someone it doesn’t already know, helps make a bank loan affordable for consumers, Horowitz said.
Other ways you can evalute a small loan
Aside from low APRs and a review of your ability to repay, here are some things to look for if you need a high-interest loan.
Full amortization: Monthly payments should pay down both principal and interest on a loan. Interest-only payments don’t reduce the loan’s principal, so interest continues to accrue at the same rate. Check the loan’s amortization schedule before you agree to borrow.
Credit reporting: The lender should report your monthly payments to at least one — and ideally all three — of the major credit bureaus. If you make your payments on time, this reporting can improve your credit.
No origination or prepayment fees: Origination fees, sometimes called administrative fees, and prepayment penalties help the lender make money, but they have little benefit for you.
A principal learned one student’s family is getting evicted. Now she’s working to find them a home
CAPE CORAL — A school principal is working this holiday season to find a home for some of her students.
Shelly Homan posted a plea to Facebook after she learned one of her students’ families was being evicted with nowhere to go. Homan is the Principal here at Heritage Charter Academy. She was helping families in need by telling them about the turkey giveaway sponsored by Cape Coral Police, when she met Vincent Ponzo’s grandchildren.
“When I asked them about the Thanksgiving dinner that the police department was giving away, I found out that they were also going to be homeless,” said Homan.
Ponzo has been looking for a new home for months, but he has bad credit, and doesn’t have enough saved for first and last month’s rent plus a security deposit.
“We’re just running out of time and options at this point, and we’re not bad people. We work hard. I’m the general manager at a restaurant, my wife works for Instacart. My daughter is trying to raise her three kids in our home,” said Ponzo.
So Homan posted an SOS on Facebook, looking for a landlord willing to rent to them. It got a lot of attention.
“Shelly called me, and I was like what did you do? And she was, oh I just put a post out, and next thing you know I’m getting all this feedback from it,” said Ponzo.
“My focus is that the kids are in a home for the holidays. So whatever, whatever I have to do to reach out. The worst people can say is no I can’t help,” said Homan.
But Homan said people have already reached out trying to help. Ponzo said he hopes he can find a home soon, but he also said his story is just one of many this holiday season.
“This takes a lot for me to stand in front of everybody and go this is what’s going on, but if I don’t do it, maybe some other guy wishes somebody did that’s about to get kicked out of his house because he’s going through the same thing or worse,” said Ponzo.
If you are interested in helping Ponzo and his family, you can call the Heritage Charter Academy at (239) 223-7530.
Savvy Group Real Estate Partners With Frazier Credit Services to Make Property Purchase in Columbus, Ohio Available to All – Press Release
Martin Lewis issues guidance on using credit cards to build ratings – best deals | Personal Finance | Finance
Martin Lewis regularly urges savers to use caution when utilising debt themed products but at the same time, he acknowledges the need for a decent credit rating to get by financially. Today, the Money Saving Expert was questioned by viewer Miranda on how one can build their credit rating in difficult circumstances.
“What I’d then like you to do is go and do £50 a month of normal spending on it, things you’d buy anyway.
“[Then] Make sure you pay the card off in full every month, preferably by direct debit so you’re never missing it because the interest rate is hideous.
“That way you won’t pay any interest.
“You do that for a year, you’ll start to build that credit history, showing them you’re a good credit citizen.
“Then you’ll be able to move into the sort of more normal credit card range.
“So, bizarrely, to get credit you need credit. What credit will you get? Bad credit, go get the bad credit just make sure it doesn’t cost you.”
Consumers of all kinds may not have the best options at the moment as recent analysis from moneyfacts.co.uk revealed.
In mid-November, they detailed that a number of high street banks have cut the perks and interest on a number of their current account deals.
On top of this, the Bank of Scotland and Lloyds Bank made credit interest cuts of up to 0.5 percent.
Rachel Springall, a Finance Expert at moneyfacts.co.uk commented on the few options consumers and savers currently have available: “Clearly, it is vital consumers decide carefully if now is the time to switch, but if they wait too long, they may well miss out on a free cash switching perk.
“At present, providers will be assessing how they can sustain any lucrative offers in light of the pandemic.
“With this in mind, we could well see more changes in the months to come and if this does indeed occur, consumers would be wise to review whether their account is still worth keeping.”
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