Will workplace loans replace predatory payday advances?: Internet Scambusters #605
A workplace loan from your employer might seem like a fast and easy route to solving a short-term financial emergency.
But, like payday loans, this kind of borrowing is ripe for abuse, as we explain in this week's issue.
We also have a warning about on offer of "free" home security systems, which is really just an attempt to see how gullible you are.
Let's get started...
Beware of Sky-High Interest Workplace Loans
Are workplace loans going to take the place of payday loans, charging outrageous rates of interest to the very people who can least afford them?
That's a fear some observers are expressing after publication of several online reports about the growth in this "shadow lending" market.
We've already covered payday advances in one of our earlier issues about predatory lending, How to Avoid Predatory Lending Scams.
And we told you about another recent worrying development -- short-term advances on pension payments, charging up to 100% annual interest rates, in Alerts Sounded on Pension Loans, eBay Scams and TV Casting.
Now, according to the Wall Street Journal (WSJ), lenders are channeling money to people directly through their employers and charging interest equivalent to an annual rate of up to 165%.
The arrangement works well for the lenders because they get instant credibility by providing loans through employers, and they get their money back directly via a deduction from the borrower's paycheck.
Furthermore, the newspaper says in a blog, although workplace loans are currently accessible to only about 100,000 employees in the United States that number is expected to rocket to 10 million in a few short years.
Workplace loans operate in a similar way to payday loans except, instead of going to a lender's office or filling in a form online, borrowers apply for the money through their employer.
They usually pay an arrangement fee -- which goes either to the employer or the lender -- and then make repayments including interest over varying terms.
Of course, like payday loans, workplace loans are perfectly legal, but that doesn't make them right if they charge astronomical interest rates.
And, in fairness, we should point out that some of the lenders and employers involved in these new workplace loans actually charge fairly modest annual rates -- as low as 10% -- and work with employees to help them manage their finances more effectively.
At the other end of the spectrum, though, are fears that unscrupulous employers might be tempted to take kickbacks from equally dubious, overcharging lenders.
Earlier this year, compensation data monitoring outfit PayScale issued this warning:
"Predatory lenders are teaming up with less-than-exemplary employers and offering the 'service' of a workplace loan. The people who benefit from the service are the predatory lenders.
"An employee requests an 'advance,' but it's not really an advance. An advance is paid back without interest or fees. The payments come out of the employee's paycheck. This is likely billed to employees as a service, because workers don't need to worry about making payments on time.
"It is a terrible idea, however, because employees now have even less cash flow than before, and will likely need another loan, and so the cycle of debt continues.
"If your employer is offering a new 'service' which 'makes it easier for you get an advance,' be wary. It's not an advance, and it's not a good deal."
There are also worries that workplace loans will just make borrowing too easy, encouraging employees to use them as a first rather than last option, trapping them in a circle of debt.
One website for entrepreneurs is currently promoting mobile apps, rechargeable debit cards and even workplace ATM-style machines that will make workplace advances faster and easier than ever.
The trouble with short-term loans is that they can appear more appealing than they really are because the annual rate of interest might not be immediately apparent.
For instance, a monthly interest rate of 10%, which is often the period of a short-term loan, converts to an annual rate of between 120% and 213%, depending on how it's calculated.
It's hard to believe but even these rates are actually lower than what some payday loan companies currently charge and, according to the WSJ article, "lower" rates have enabled some lenders to avoid state restrictions intended to curb their activities.
In the past four years, several non-bank lenders have started marketing loans to companies and payroll vendors, says the WSJ.
"The firms are part of a broader push by so-called shadow lenders to take a growing share of the traditional banking business," it adds.
"Banks have toughened their lending standards since the financial crisis, leaving small companies and individual borrowers with battered or insufficient credit histories to search elsewhere for loans."
If you're one of those people, or you know someone who is, you/they should try to get proper financial advice before opting for a high-interest loan, wherever it comes from.
Try your bank first, or contact the non-profit National Foundation for Credit Counseling for guidance on where to get help. Also, check out our previous reports mentioned earlier.
In some extremely limited circumstances, workplace loans might help you with a short-term budget emergency, but they should never be part of your long-term financial solution.
Alert of the Week: Don't be tempted to press a key on your phone for a free home security system in return for allowing a sign to be placed in your front yard.
There's no security system and no sign. What you've done is let the scammer know you're gullible and ripe for more spam offers.
That's all for today -- we'll see you next week.