High-Cost Small Loans
High-cost small loans are not as big as a mortgage but they have high interest and fees.
These loans end up trapping people in debt. Advertisers target people who do not have much money. These are the people who really cannot afford these loans.
There are many kinds of small loans. Some are:
- payday loans,
- overdraft loans,
- auto title loans,
- tax refund anticipation loans, and
- rent-to-own transactions.
Lenders often charge 300% to 1,000% or higher interest. The interest rate is not obvious to the borrower.
New Hampshire has strict laws on small loans.
Payday loans
Companies advertise payday loans as a way to help you pay your bills until you get your next paycheck. But payday loans can end up dragging your family into deeper money problems.
To get a payday loan, you give the lender a check for the amount you borrow plus a fee. The check is dated in the future. This is a “post-dated” check.
The lender holds your check for 1 to 4 weeks, usually until your next payday.
When you get paid, you pay the lender the amount written on the check, and he gives your check back to you. Or you let the lender cash the check.
Payday lenders will offer you another loan to pay off the first one. This second loan will put you further into debt.
The fees for payday loans are very high and the interest rates can be as much as 1,000%.
New Hampshire has strict laws on payday loans. The interest rate on payday loans is 36%, and no charges or fees are permitted. Payday loans may not be made in an amount more than $500. Borrowers cannot take out more than one payday loan at a time or more than one within a 60-day period.
Overdraft loans
Banks advertise “bounce protection” plans. When you want to take money from your account but do not have enough of it, the bank will give you the money anyway. If you overdraw your account, the bank pays the overdraft.
Often banks do not tell you that you are overdrawing on your account and that the money you are getting is a loan. They also do not always tell you about the high fees they charge for this overdraft loan. Banks earn money from the high fees from these plans.
Bounce protection plans are aimed at low- and moderate-income customers.
Refund anticipation loans
Most taxpayers get their income tax refund in 2 weeks or less.
Companies that prepare taxes advertise “Instant Refunds” and “Quick Cash” for customers who need money in a hurry. These bank loans last 7 to 14 days until your tax refund comes back and repays the loan.
Companies target low- and moderate-income people with advertising for refund anticipation loans.
In the last couple of decades, it has become easier and easier to get high-cost small loans.