With the moratoriums on evictions* and foreclosures expiring this month, predatory lending practices will sadly likely be more prevalent this summer. Given that, we’ve decided to take a pause on our retirement series and revisit our predatory lending series.
*Certain renters in high-transmission areas may still be protected from eviction until October 3rd – review this CDC document for more information!
This week we’ll return to our discussion on predatory lending and discuss overdraft loans and rent-to-own contracts.
Overdraft loans, or overdraft protection, is a financial product that will temporarily cover you if you bounce a check or overdraft with a debit card, providing you a loan to cover that expense. However, the fees can be very expensive, from $10 to $40 per transaction, and the interest charged is often at a very high rate that isn’t readily disclosed. An $80 overdraft can carry fees and interest of over $20 for just a one-week repayment, resulting in an equivalent APR of over 1000%! As a comparison, a line of credit, at 19% APR, would have interest and fees of less than a dollar for an $80, one-week loan.
Next, we’ll discuss rent-to-own contracts. Rent-to-own contracts are agreements where the buyer will pay monthly or weekly rental payments for merchandise, such as electronics or furniture, and once they’ve completed all of their rental payment, will have ownership of that merchandise. There are a few catches, however. There are very few regulations regarding rent-to-own contracts. As such, their high interest rates are rarely disclosed, and there are no limits to late fees, nor much protection against repossession. Furthermore, as a rental contract, no equity is built up with each payment, meaning if you miss payment number 76 of 78 and the item is repossessed, you’re unlikely to get any money back.
Next week we’ll return and wrap up this series and discuss alternatives to predatory lending.
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