When your budget won't let you give gifts to everyone in the world—which is always, by the way—who should you give...
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Cash advance, payday loans, title pawning and tote-the-note car lots are examples of rip-off predatory lending designed to take advantage of lower-income people and benefit only the owners of the companies making the loan. Lower-income people will remain at the bottom of the socio-economic ladder if they fall for these rip-offs.
These "lenders" (or, as I like to call them, "the scum of the scum") are bottom feeders and legally make themselves rich on the backs of the poor or those soon to be poor. The lending rates of these types of operations are over 100% interest, and if you want to stay on the bottom, keep dealing with these guys. You know why these types of operations are located only at the poor end of town? Because rich people won't play. That is how they got to be rich people.
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The payday loan is one of the fastest-growing trash lenders out there. You write a check for $225, dated for your payday because you don't have the money to cover it until right then. The payday loan company will give you $200 cash on the spot - all for a mere $25 service charge, which equates to over 650% interest annually!
Mike called my talk show and was caught in a web of payday loans. Basically, Mike had borrowed from one trash lender to pay another, and by doing this again and again had created a cycle of financial death. He was panicking because he was being threatened with criminal charges for writing bad checks by the very places that have a business model based on postdated ``bad`` checks. This type of business is legalized loan-sharking. The sad thing is that the only way out for Mike is to pop the balloon. He has to stop paying them, close his accounts, and then meet with each lender to work out payment arrangements. That will mean extra jobs and selling things around the house.
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The classic tote-the-note car lot is no better. Most of these transactions involve older, cheaper cars. The dealer purchases these cars and sells them for a down payment equal to what he paid for the car, so the payments at 18 to 38% interest paid weekly are all gravy. In fact, the down payment could have purchased the car if the buyer had been a little savvier.
If you use payday loans, tote-the-note, and rent-to-own, please understand that you are being destroyed financially. These businesses feed on the working poor, and you must avoid them at all costs if you want to win with money.
Want to learn more? Pick up a copy of Dave's best-selling book The Total Money Makeover.