Executive Director, CoPIRG Foundation
Executive Director, CoPIRG Foundation
DENVER: As Coloradans’ budgets get stretched this holiday season and consumers are enticed to take out loans to pay for larger expenses or accept Buy Now, Pay Later offers, the Center for Responsible Lending (CRL) and CoPIRG Foundation released a new report, policy recommendations and consumer tips to help Coloradans avoid expensive financial pitfalls and debt traps.
CRL’s new report, Upsold and Weighed Down, found that one type of financial product, “supervised” installment loans, which typically range between $2,000-$10,000 with multi-year terms, come packed with fees for low-value, high-cost add-on products that are not included in the loans’ APRs, but can add hundreds of dollars onto borrowers tabs. When you include these fees, APRs for these loans could exceed current statutory limits.
CRL recommends that regulators and lawmakers scrutinize these products and implement appropriate consumer protections.
“Our analysis shows evidence that these companies are laying heavy burdens of debt on Coloradans and upselling products that provide borrowers little to no benefit, jacking up the loan principal, adding costs that don’t show up in the APR, and at times extending the debt burden by renewing the loan,” said Whitney Barkley-Denney, deputy director of state policy and senior policy counsel with the Center for Responsible Lending (CRL). “Regulators and lawmakers across the country should take note of practices going on under the radar and put a stop to the harm being done. And of course, raising interest rates is certainly not appropriate for large loans with problematic terms.”
In addition to warning consumers and policymakers about high-cost loans, CoPIRG Foundation released a consumer alert around Buy Now, Pay Later offers, reminding consumers that products bought under these plans may be harder to get a refund or return if there’s a defect, and could come with overdraft fees or charges that are more expensive than a credit card.
“Buy Now, Pay Later offers are a mix between an old-fashioned layaway plan and a predatory, high-interest credit card just for the privilege of paying something off over a few weeks,” said Danny Katz, CoPIRG Foundation, executive director. “If you are considering the offer, make sure you know the fine print so you don’t get hit with fees or interest, know when payments are due since dates can vary and payments can stack up, and know you have less protections if you want to return items.”
CRL combed through loan agreements for supervised loans taken out by Colorado borrowers. Most of the loans were between $4,000-$8,000 with terms of two to five years. According to their review, APRs ranged between 21-28%, resulting in huge finance charges that can be equivalent to nearly 50% of the size of the loan.
For example, one borrower received a loan of $6,882.90 with a four-year term. Although the 21.46% APR was low compared to others CRL reviewed, it generated a finance charge of over $3,400, requiring her to make total payments of more than $10,000 to repay the loan in full by the end of the term. Another loan agreement showed a loan amount of $5,868.19 with an APR of 22.79% and a 5-year term. The finance charge came to over $4,000 for this loan, requiring a total repayment of $9,883.80.
CRL’s analysis also found beyond the finance charges accrued on these loans, many of the loans they examined were also subject to credit insurance, which imposes additional costs to borrowers and increases their debt loads. Specifically CRL found:
- In general, the premiums charged were high relative to the amounts actually paid on claims.
- Despite the high cost and low value to the borrower, insurance policies and/or other add-ons like automobile club memberships were included with 60% of the loans reviewed.
- In many cases the borrower was sold multiple insurance policies.
- In thirteen cases, the cost of these purchases consumed more than one-tenth of the loan proceeds.
- In six cases, borrowers took on more than $1,000 in additional debt to cover the add-on costs.
In addition to the presence of add-on products and credit insurance, renewal loans—loans that pay off existing loans to the same lender—are common. Twenty-four of the 67 loans in the sample were renewals.
The loans analyzed demonstrate the high cost of the loans at the rates currently permitted by Colorado law and consumers should use caution when pursuing these loans.
CRL recommends regulators and policymakers should examine “supervised” lender practices to ensure they are not deceptively pushing borrowers deeper into debt through loan-related transactions that profit the lender at high cost and little benefit to the borrower.
As for Buy Now, Pay Later offers, CoPIRG Foundation reminded consumers to understand how the programs work before signing up. Purchases are generally split into four payments, with the first due at checkout. The other three payments are typically due every two weeks and are billed to a credit card, debit card or bank account that you provided at the outset. This means you’re entering an agreement for the privilege of paying for something over as little as six weeks.
CoPIRG Foundation offered the following tips:
- Do your homework before agreeing to a “Buy Now, Pay Later” program. This means reading the terms and conditions.
- Realize that some BNPL programs charge interest, although most don’t if you make your payments on time. In some cases, you may have to pay interest not just for one month, but for the duration of the repayment period.
- Be sure you always have adequate funds in your accounts to make BNPL payments. The BNPL payments may fall at different times of the month from your regular credit card statements, so be sure to budget appropriately!
- Realize that BNPL plans don’t offer the federal protections that come with purchases you make by credit card. If an item purchased with BNPL is faulty, lost or stolen, that does not mean you will have protection against having to repay the BNPL loan. The federal government offers that safeguard for credit card users.
- Understand you are not guaranteed a refund. If you want to return a product you bought with BNPL, you may not be able to get a refund. Look at the fine print to find out whether refunds are available.
“Ultimately, I advise people to consider whether you can delay the purchase until you have the money. Will paying for something over six weeks really help you? It’s always best to pay for items outright rather than be subject to interest and late fees,” said Katz.