Choices to Avoid at All Costs
Below are “quick money” strategies that you should avoid at all costs. An entire industry of unscrupulous businesses exists to pressure you into making costly mistakes. These businesses know that people in financial distress often make desperate or poorly informed choices. They also know that people who feel that their options are limited are likely to be willing to overpay for credit and other services.
Unfortunately, even seemingly reputable companies operate businesses that take advantage of consumers in financial trouble. You cannot assume that because a company is well known or because it advertises on TV that it will give you a fair deal. Also be suspicious of companies that use names which are designed to create confusion about their identity, such as using the name “United States.” Some companies use names very similar to legitimate organizations just to confuse you.
There are two cardinal rules to follow:
- ● If it seems too good to be true, it probably is.
- ● If you are in financial trouble, be wary of anyone seeking you out and offering you a way out of your problems. Most legitimate options wait for you to contact them.
The following list warns you to avoid seventeen practices that may increase your financial problems, not solve them. This is not a complete list of scams. New scams constantly emerge, and old ones change form. The main message is that services aimed at people with bad credit or other financial problems are often rip-offs. If the services seem too good to be true, they probably are.
Debt Elimination Scams. These are internet offers to totally eliminate your debt. They are bogus, will just cost you money, and will prevent you from taking the proper steps to deal with your debts. See Chapter 12 for more on debt elimination.
Debt Settlement Offers. A whole industry advertises the ability to settle your debts for less than what you owe. They claim that you put away money each month in a special account and at some point they will settle the debt for the money in the account. This rarely happens—they rarely settle your debts, always take a lot of your money in fees, and get you into trouble with your creditors. Since your payments are going into a special account and do not go to the creditor, you will be subject to debt collection, negative reports to credit bureaus, and even collection lawsuits. More on problems with debt settlement is found in Chapter 12.
Foreclosure Rescue Scams and Sale and Lease Back of Your Home. Some scam operators read published foreclosure notices, and then seek out the homeowner with a plan to “rescue” the home. Other companies advertise “We Buy Houses”—stay away from them as well. Often these scammers buy your home at a low price (or for nothing at all) and lease it back to you, with promises that you can get the home in the future. You may not even know that in the mound of paperwork that you have sold them your home. You will be overpaying them in rent, and may never get your home back.
Rip-Off Reverse Mortgages. As explained in Chapter 6, reverse mortgages are complex loans that have benefits and costs. Evaluating whether to take out a reverse mortgage is a difficult decision and requires consultation with a knowledgeable nonprofit counselor. Both your home and a sizeable amount of money are at stake. For this reason, the federal government creates standards for legitimate reverse mortgages, called HECM mortgages. Be extremely suspect of any reverse mortgage offer that is not a HECM mortgage, because you risk losing not only a lot of money, but even your home.
Credit Repair. Credit repair agencies, sometimes called “credit services” or “credit clinics,” offer to clean up your credit record. They charge a hefty fee and usually cannot deliver what they promise. You generally can do a better job cleaning up your own credit record at no cost. See Chapter 3. These agencies may even make matters worse for you or cause you legal problems.
Payday Lenders. Payday loans go by a variety of names, including “deferred presentment,” “payday advances,” “deferred deposits,” or “check loans,” and operate out of check cashers, over the internet, and elsewhere. They all work in the same way. You write a check or sign an authorization for the lender to take money out of your bank account electronically. The amount on the check or authorization equals the amount borrowed plus a fee. The check is due to be cashed or the electronic debit due to be initiated on your next payday or receipt of a government check.
Too often you will find that when it comes time to repay the loan, you do not have sufficient cash in your bank account, or you need the funds there for more pressing purposes. You then have no choice but to roll over the loan into a new loan with a new fee. While the initial fee may appear modest, the effective annual rate of the loan is often as high as 400% or 700% or even higher. As you roll this loan over each time, the balance quickly grows, making it more and more difficult to repay. You become caught in a spiral of rolling over the loan each month, accumulating ever more fees and interest at astonishingly high interest rates, and the total amount you end up owing can quickly skyrocket.
Auto Title Lending. Auto title lending, often called “auto pawn,” “auto title,” or “auto equity” loans, are legal in some, but not other states. You borrow money at very high interest rates (for example, 240% or 500%) and put up your car title as collateral for the loan. If you are unable to repay the loan when it becomes due or pay another fee to refinance the loan, your car will be repossessed and sold. Automobile title lending is not as simple and hassle-free as the title lenders advertise it to be. You can borrow money elsewhere at lower interest rates without endangering your car.
High-Cost Installment Loans. There is a growing industry offering high- cost loans of anywhere from $300 to $3,000 or more, that you pay off in monthly installments over anywhere from six months to five years. These loans come in all kinds of shapes and sizes. Some are by licensed lenders in your state and charge interest rates in the 30% to 60% range. On top of that, they may sell you overpriced credit insurance. The real risk with these loans is that very often these loans are rolled over into new loans when you have trouble paying them off with their high interest charges, meaning that your indebtedness grows to much more than you originally owed, and keeps growing each time you roll over the loan. Not to mention that your car or home might even be taken as collateral.
Other installment loans are sold over the internet and seek to avoid state regulation. Then the sky is the limit as to interest rates, which can be as high as several hundred percent. Make sure to look at the Annual Percentage Rate (APR). Avoid any loan with a high APR number—certainly any rate above 36%. Some high-cost loans today are claiming to have a zero percent APR, but then charge high fees based on your outstanding balance. This is a sure sign of a predatory lender to be avoided at all costs.
Refinancing and Consolidation Loans. Any offer to consolidate your loans or refinance existing loans must be carefully considered. Too often the end result is that you are worse off than before. Your old low interest or no interest loans are turned into high interest loans. Prepayment penalties to pay off your old loans early are added to the new loan. Closing costs and other up-front charges and fees are also added to the new loan. Be especially wary of anyone who sought you out for the new loan or anyone that is not an established lender in your community.
If you have federal student loans, it is generally not a good idea to consolidate them into a private student loan. Federal student loans come with all kinds of rights, including rights to cancel the loan, defer any payment for a year or more, and payment plans that match your income. These rights are generally unavailable if you consolidate into a private loan. On the other hand, there are good reasons to consolidate federal student loans into a federal student consolidation loan—that is, one with the U.S. Department of Education. For more, see Chapter 13.
Student Loan Debt Relief Scams. For-profit private companies charge high fees to assist you in dealing with your student loans, when what you should do is contact your student loan servicer to obtain relief at no charge. The for-profit private companies prey on students and recover large fees for unnecessary work. See Chapter 13 for your rights to cancel, delay, or reduce student loan payments you can obtain directly by working with your servicer or the Department of Education.
Rent to Own. Appliances, furniture, electronic equipment, and even used cars are offered on a rent-to-own basis where you do not own the item until you consistently have made years of weekly or monthly payments, and where the effective interest rate on the purchase can be 300% or even 500%.
Auto Brokers. When you are having trouble keeping up with your auto loan or lease payments, these brokers offer to lease or sublease your car for you for a fee. The practice is illegal in many states. Moreover, the broker may try to keep payments it receives from the person using your car and may not even obtain permission from your creditor or lessor for the arrangement.
Subprime Credit Cards. Some credit cards marketed to those with low credit scores charge so many initial fees that 25% of your credit limit is already taken up by fees, and very high interest rates are then applied to the fees as well as any purchases. As a result, the effective interest rate on your credit card charges is much higher than you think it is. The same may also be true for interest rates as indicated on the disclosed annual percentage rate.
Bouncing Checks and Postdated Checks. It is tempting to write a check, use your debit card, or authorize an electronic debit when you have insufficient funds in your account to cover it. At best, you may hope to make a deposit before the check is cashed. At worst, you may be deliberately using the check payment as a way to make the creditor leave you alone for a few days.
Avoid this temptation. Bouncing checks is never the answer. You will be charged a hefty fee, often by both the bank and by the creditor each time the check is presented for payment. And creditors may present the same check for payment a number of times. You could also face threats of criminal prosecution for fraud. Although you may be able to defend yourself successfully if you are prosecuted, it is better not to have to deal with this problem at all.
When in doubt, look up your account balance before writing a check or authorizing an electronic debit. Your balance may seem higher than it really is because other payments you have made from your bank account have not yet been deducted from your account. If you have a joint account, coordinate your check writing carefully with any other person who has power to write checks and make withdrawals.
You might also be tempted to write a “postdated check,” that is a check dated later than the date on which you write it. You do this assuming it will not be cashed until the date written on the check, when you hope to have sufficient funds in the account. Despite what you may think, the check can be cashed immediately; a bank need not wait until the date written on the check to cash it.
Instead, delay payment until you are sure you have sufficient funds in the account. That way you are not surprised that the check is cashed early. If things change in the interim, it is not too late to direct your funds to something else more important. And you avoid the cost of bouncing a check or electronic debit.
Using Overdrafts as Credit. Many banks and other financial institutions permit you to deliberately overdraw your account. The bank will honor a check, debit card payment, or ATM withdrawal even if you do not have sufficient money in the account. This is often an incredibly expensive way to pay your obligations.
Banks charge high fees for each overdraft, up to $35 per transaction. Some banks also charge a fee of up to $5 every day or $30 every few days until you repay the overdraft. Banks pay themselves back the amount of the overdraft and fees out of your next deposit, before you can use the money for other essential bills like your mortgage or utility payment. A $100 overdraft with a $30 fee has an interest rate of 780% if the overdraft lasts two weeks.
For ATM or one-time debt card transactions, the bank can only honor the payment and charge you a high fee if you affirmatively consent or “opt in” to this arrangement. Do not do so and revoke your consent if the bank already has gotten you to opt in.
Selling or Giving Away a Creditor’s Collateral. You may have a car or other property that serves as collateral for a loan from one of your creditors. It is a bad idea to give away or sell a creditor’s collateral without the creditor’s permission. This is called “conversion” of collateral.
You may of course sell collateral if the sale price you receive is enough to pay off the existing loan. If the collateral is a car, typically you will need to pay off your loan and have the lender release the lien in order to give good title to the buyer. If you are selling the car to an individual, you may need to work with the lender to determine the amount of the payoff and the release of the lien in order to transfer title.
But if you give away or sell collateral without the creditor’s permission, you risk being prosecuted for a criminal offense. A defense to a criminal prosecution is that your conduct was not intentional, that you did not understand that the property was collateral or that you did not know the consequences to the creditor of disposing of the property. In addition, most such prosecutions and lawsuits can be ended by payment of the value of the collateral either in installments or in a lump sum if you have it. Jail time is rarely or never imposed. Still, this is not a risk worth taking.
Get-Rich-Quick Schemes. Many products and jobs are advertised with the promise that you will make a lot of money quickly. These are almost always scams.
For example, real estate investment seminars are sold with the promise that you can make a bundle by buying and selling investment property. The reality is that the only one making a bundle is the person selling you the seminar. When seminars of this type are offered for free, the person running the seminar will usually aggressively try to sell you something very expensive.
A similar problem involves jobs which are offered with the promise of making quick financial returns. A common example is an advertisement with a bold heading such as “Make up to $1,000 a week immediately—working at home.” The vast majority of these offers require payment of substantial “set up” or “one-time start-up” fees to a person or company that promises you a money-making plan in return. The company keeps these fees and you end up with no real way of making money.