Financial Horror Stories Begin with High-Cost Lending
“No credit? No problem” ads are everywhere, and predatory lenders often lurk in their shadows. Unfortunately, such appealing ads make it tough to recognize bad actors as they lure unsuspecting victims into their dark web of a downward debt spiral. The ease of this high-cost funding option can be tempting to someone with bruised credit searching for a quick solution to their financial problem. Quite often, commercials compel consumers to accelerate their purchase timeline or add a monthly payment beyond their affordability. Hefty fees, high interest rates, and alluring ads promising to “fix” financial problems are ways that predatory lenders prey on vulnerable consumers who feel they can’t access healthy financial alternatives.
Alternatives to predatory lending exist, but it can be hard to look for the best option when faced with the trauma of a financial crisis or the temptation of an easy fix. Instant gratification or impulse shopping can be costly. If financing a large purchase like furniture or appliances without an emergency, the option to save before buying is there. Taking the time to make the purchase in cash will keep the budget from being stretched to accommodate an extra payment and the interest and fees that come with it. Another benefit to planning large purchases is it will allow saving for the next goal to begin immediately.
Beating the Predatory Lending Monster
When in the middle of a financial crisis, it can feel like a small-dollar loan is the only option. However, there are alternatives. When money to pay an emergency expense exceeds available funds, it is tempting to panic. However, panicking can kill the creativity that is needed to generate the lacking funds. Here are a few alternatives to explore before borrowing from a high-cost lender.
- Increase income. This option may sound impossible, but advances in technology have increased the possibilities for additional income streams. The traditional options for supplemental income like working overtime, getting a second job, starting a side business, and selling belongings are still available, but now technology has made it possible to add teaching a virtual class, buying items and flipping them online for a higher price, selling crafts, or selling refurbished furniture online, just to name a few. Another way to create more income is by adding gig work like ride-sharing, food/grocery delivery, or being a personal shopper. Taking inventory of interests, skills, and abilities to find an alternative to borrowing can help decrease the amount you borrow or replace the need to borrow completely. It may even be fun!
- Decrease Expenses. The chances are good that there are expenses that could be reduced or even cut for at least a short time. In many household budgets, the categories that have the most flexibility are food and entertainment. Shopping with a grocery list, shopping sales, and finding alternatives to high-cost foods may be a place to start. A couple of suggestions for reducing entertainment is only subscribing to a few streaming services and rotating, or calling cell phone, cable, and internet companies to compare pricing and asking if there are any current promotions. Determining needs from wants is the hardest part of any budget analysis, but asking the question, “Would this alter my life if it were not an option?” may help make the choices easier to identify.
- Start with a trusted financial institution. The fear of rejection keeps many people in the predatory lending cycle long after qualifying for mainstream financing. If none of these options will work, starting with a trusted financial institution can alleviate the need to use a predatory lender. Reputable financial institutions offer much lower interest rates than storefront lenders, and these lenders are more regulated and have more standard terms for lending than predatory products.
Becoming Your Own Credit Superhero
Another predatory financial category is the services that “help” you increase your credit score by working to “fix” your credit. One of these types of services is debt settlement. Debt settlement services are companies that specialize in negotiating your unsecured debt with your creditors. Though this sounds like a win/win for everyone, there are a few things you should know first:
- Debt settlement results are not guaranteed because it is up to the creditor to agree to the settlements. Creditors are under no obligation to settle, and there is no guaranteed amount they are required to offer.
- Harmful credit actions may be required to settle. It is harder to negotiate a settlement for a customer who is paying as agreed. Usually, debt settlement companies ask you to stop paying your debt and instead pay into a settlement account. The debt settlement company will take their fee off the top, and the rest accumulates until they have enough money to make an offer.
- It could take years to rebuild credit after settlement. It can take many months to accumulate enough money to pay off just one debt, and you will be paying a monthly fee every month. In addition, every month the missing payments are reported late to the credit bureaus, thus exacerbating the problem and raising the price tag for future borrowing.
- Settle debt for free! Debt settlement companies are not doing more for you than you can do for yourself…for free! Credit card companies will likely settle directly with consumers, but they may have other programs to help customers experiencing hardship. If given a chance, many creditors will work to ensure they can retain the customer relationship. Some possible alternatives include a reduction in interest rate to aid in debt acceleration, a temporary pause in payment due (deferment or forbearance), and perhaps they will even remove some fees. Give creditors a chance to be amazing; the results can be surprising.
In this season of ghosts and goblins, don’t fear the predatory lenders. Instead, fight back with alternatives and knowledge. Next month in part two of this series, we will discuss other types of predatory financial products and how to ensure you will always have an alternative.