obby is 18, the type of kid you'd be proud to call a son: hard-working (he holds down two jobs in the summer, and a part-time one during school), interested in sports, very responsible, and very proud of his 10-year-old but meticulously maintained Toyota. It is his first car, bought with cash earned from all three jobs.

Bobby's also independent and impatient at times, like any teenager who sees something he or she really wants and feels justified in buying right then. One year ago Bobby did that with a $1,500 digital car stereo system. But rather than finance it at the shop, which would have required a parent's signature, Bobby stopped into "MoneyOnTheSpot" (a made-up name), right there in the same strip mall as the stereo shop. MoneyOnTheSpot promised "Cash in Five Minutes or Lunch Is On Us, 100% Guaranteed!" All they required was—the title to a car!

As long as Bobby only planned to keep this loan for a month or two until his full-time summer jobs started, what was the harm in using the title to his handsome Toyota? This very friendly place had the paperwork done in less than five minutes, quickly explained the 22% "fee" (they said they didn't really charge interest), and pointed an excited Bobby back to the stereo shop, check in hand.

The Toyota "rocked" for the next few weeks, and Bobby's plan to make enough to pay off his loan was on schedule, too—until a drunk ran into the back of his car. Overnight, Bobby faced three weeks without transportation to his jobs and, more important, a new thousand dollar bill on his car: The drunk had no insurance, and Bobby's insurance had a whopping deductible.

When the payment was due at MoneyOnTheSpot, Bobby made it, but he couldn't reduce the $1,000 principal. Very quickly, that principal escalated, and very quickly Bobby learned about the fine print on this company's loan papers. The 22% "fee" was for each month Bobby owed money. In one year he would have to pay 264% interest, and in the one year it would take Bobby to finally pay off the friendly people at MoneyOnTheSpot, total payments on his $1,000 loan would be $5,460.
    Some home equity
    lenders charge
    higher rates than
    conventional lenders,
    and give you
    no grace period
    before seizing
    your home.

You will pay
three times as much
for a product
at rent-to-own
places than by
paying cash.

Welcome to the reality of "predatory" lending
If you live in Florida or many other states, your child or your parents could be the victims in this story. And if you find the thought of paying 264% interest nightmarish, hope your college-age child doesn't need to borrow money in Iowa. CampusCash, an actual "service" in Iowa's university communities, charges students 467% interest on an annualized basis for a two-week loan. CampusCash makes one-month loans, too, according to Credit Union Magazine. Even that's cheap, relatively speaking: The maximum interest rate on a two-week "payday" loan in Iowa is 1,000% on an annualized basis.

Why would anyone fall for such interest rates? The obvious answer—the person has no other choice— usually is the wrong answer. According to the general manager of Title Loans of America, one of the biggest companies in the title loan business, more than half its customers make more than the $39,000 national median income, and 30% make more than $50,000.

Income isn't usually the problem, access to money right now is the problem. A student may be maxed out on a credit card, for instance; or a senior citizen on a fixed income may need unexpectedly expensive therapy not covered by Medicare. Or a worker with access to a bank account simply may need a place to cash a check or receive an advance until payday.

Who are the predatory lenders?
Surprise, these are some people you've probably thought of dealing with yourself! Not everyone in each of these "lending niches" is a predatory lender. But you would do well to pull out the magnifying glass before using any of them:
  • "Rent-to-Own" companies. You will pay three times as much for a product at one of these places on average than if you pay cash, according to the National Center on Poverty Law. Rent-to-own places, when they actually disclose an interest rate, regularly charge a 100% effective interest rate.

  • Pawnshops. They've had face lifts, and they appear in the finest malls now, but pawnshops are the grandfathers of predatory lending. Compared with some of the new players in predatory lending, their rates seem nearly cheap. Most shops charge "only 25% interest per month." That's a mere 300% per year.

  • Some home equity loans. You've seen online and television ads with toll-free phone numbers or online applications: "125% of your home's value! Just call 1-800-ripoffs!" These companies, regardless of their commercials, generally charge dramatically higher rates than conventional lenders, and give you virtually no grace period before they seize your home.

  • Credit cards tied to home equity loans. In a chilling twist on predatory home mortgages, some companies actually will issue you a credit card tied directly to your home equity loan. In small print tied to the credit card application, the lender states "You may lose your home if you miss any of these payments...," according to the National Center on Poverty Law. How would you like to lose your home because you were late on a credit card payment?

More than half
of title loan
customers make more
than the $39,000
national median income,
and 30% make more
than $50,000.

Much better options
The list of rip-offs for unwary consumers with limited credit options goes on. But what can you do if you find yourself in a bind for money-right-now?

First, educate yourself and your family about the dangers of "easy" money. If your children have title to a car, tell them about title loan operations and tell them to stay away. Tell them about rip-off lending services near their colleges and trade schools. And then help them open a savings account at the credit union. Many credit unions allow members' children to apply for lines of credit guaranteed by the young person's savings account.

Are your college kids talking about furnishing their new apartment? Warn them about rent-to-own establishments that have sprouted around virtually every campus these days.

If your parents or other senior citizens you know own their home but are having financial problems, tell them about reverse mortgages: These mortgages let the owner "spend" their equity rather than borrow against their equity—sometimes a prudent solution, but sometimes creating a risk of having the home repossessed. The National Center for Home Equity Conversion can provide lots of information.

Second, take an interest in the predatory lending issue. Lawmakers in many states are under great pressure by credit unions to rein in lending abuse. Ask the people at your credit union if it is involved in any such activities in your state. And if you really want to be scared, go to a search engine right now and simply search "predatory lending practices." You'll find more than 1,000 sites discussing the problem!

Remar Sutton's car-buying tips have been featured on "Good Morning America," "Today," "20/20," "Nightline," and in magazines such as People, Newsweek, and Credit Union Magazine. He's president of the national Consumer Task Force for Automotive Issues.

© 2000 Credit Union National Association Inc.