The “Nasty Nine” are legal, but costly services that consumers should avoid. When money is tight it’s easy to overlook the costs and use some of the “nasty nine” because they offer an immediate solution”, stated Joyce Lash, Family Resource Management Program Specialists for Iowa State University Extension. “Communities and individuals should work with financial institutions, employers, and services to make sure alternative are available.”
The “Nasty Nine” include:
#1 Check Cashing – Typically used by individuals who don’t have a checking account. The charge can be 3%-7% of the check’s face value. It would cost you over $1000 per year to cash a weekly $500 paycheck. The use of debit style cards for payroll is becoming more popular and increases the opportunity for these fees.
Solution: Finding a low cost checking account or share draft account at a credit union is a solution.
#2 Buy Here/Pay Here Car Dealers - Cars are sold based on the monthly payment, but the interest rate and total cost for the life-time of the loan is hard to understand. The cars are typically sold at 50% to 100% of their value. An annual interest rate of 36% can be charged. Payments are due on every payday. If one payment is missed the car is repossessed at midnight. The average reposed car is sold five times a year.
Solution: Use a dealer who can arrange bank financing. The loans are more closely regulated by consumer laws. Find someone who will co-sign if your credit history is poor. Work to resolve unpaid debts and make new payments on time to qualify for standard loans.
#3 “Courtesy” Overdraft Loans – Automatic loans to honor checks, ATM withdrawals, and cash-card transactions. Banks typically process courtesy-loan customers deposits last, and checks in largest to smallest order to maximize customer fees. A fee is charged to set up each loan; the amount exceeds the state limits on overdraft fees. Banks charged at least $17.5 billion in 2007 to issue $15.8 billion in overdraft loans.
Solution: Read the fine print before opening this type of service; be sure you understand the costs. Create your own checking reserve.
#4 Payday Loans – Iowa allows up to 780% annual interest on these post dated checks. A $500 check for two weeks would be repaid with $555. If you can’t cover the payment in two weeks you can take out another loan. Typically customers do this eight times. $500 “reborrowed” for one year will cost you $1,430.
Solution: Contact the individual or business who will receive the payment late and work out a suitable agreement. Make changes in your spending plan to avoid overspending. Find ways to increase your income.
#5 Refund Anticipation Loans – Short term loans by tax preparation chains. You get your refund on the day the return is completed and don’t have to wait 10 days for a direct deposit of the refund for a cost of 235% annual interest. If the IRS finds an error in the return it must be repaid as a loan. In 2006 the amount charged for these loans was $23 million.
Solution: Use free tax preparation services if you qualify. Open a checking or savings account and your refund will be deposited within 10 days, sometimes sooner.
#6 Rent to Own – Attractive way to buy household goods. The payments are low, but the length of time and interest rates are high. A $200 TV will cost about $700 when paid in full. Annual interest rates and fees equal 100% to 300%. Repossessed items are often resold, and repossession can occur even if you have one payment remaining.
Solution: Comparison shop and use the low cost financing available through appliance and furniture stores. Work to improve your credit history to qualify for standard financing.
#7 Sub-Prime Mortgage Loans – Loans typically have extra points, insurance fees and prepayment penalties. Frequent refinancing or “flipping” results in income for the broker and lender. Borrower would often qualify for better loans.
Solution: Visit with local banks and lenders to learn about other options.
#8 Title Loans – Short term (30 day) loans secured by a car title. Iowa caps the loans at 21% to 36% per year, but other states allow a rate as high as 300% and they are available online. Lenders hold a set of keys and repossession is immediate when a payment is missed.
Solution: Visit with individuals and businesses to arrange for changes in your payments or extra time to raise the funds. Work on your spending plan to keep costs within the available income.
#9 Credit Cards – Read any information that comes with your current bill. Credit card companies have extracted billions in fees and charges for these easy to obtain lines of credit. New rules will stop some of the worst practices such as universal default, two-cycle billing, retroactive increases in interest charges, and high fees for a late payment. Young people under the age of 21 will no longer be able to obtain a card unless they have an adult co-signer or show proof of income. New rules don’t go into effect immediately.
Solution: Pay the outstanding balance each month or limit use of the card to emergency items. Compare charges and fees before opening an account. Read all the information that is included in your monthly bill. Close an account and pay off the balance using the old terms if new terms are not acceptable by sending a written letter to the lender within 60 days of receiving new credit terms. Limit the number of cards to two. Don’t carry a balance that exceeds 30-50% of your available line of credit.
For help with finances call the Iowa Concern Hotline: 800-447-1985.