Myths & Truths about your personal finance options

What is predatory lending

MYTH:

Only banks and credit unions on military installations can be trusted to avoid "predatory lending" practices.

TRUTH:

Predatory lending is a "practice," not a characterization of a particular type of financial institution or where the institution is located. Predatory lending can be defined as triple-digit annual percentage rates or practices that generate excessive fees, or deliberate deception to conceal the nature of the transaction from unsophisticated borrowers. Predatory lending can include payday lending, title pawn lending, bank and credit card overdraft fees, and mortgage lending. Consumers who are targets of these practices are frequently sub-prime borrowers, which is a characteristic of a significant portion of service members.

Non-prime and sub-prime loans

MYTH:

Non-prime or sub-prime loans are harmful to service members' financial readiness.

TRUTH:

Non-prime and sub-prime lending provides access to credit for consumers who are unable to qualify for a lender's "prime" rate because of a poor or limited credit history. Even though credit history and credit scores help determine the interest rates consumers earn, there are perceptions that all non-prime and sub-prime rates are "predatory," which simply isn't the case. For those who are not eligible for "prime" rates, non-prime and sub-prime loans can be "responsible" alternatives. While the rates may be higher, non-prime and sub-prime lending offer consumers access to funds and provide an opportunity to build a more robust credit history. In a service member's case, this ability to improve credit scores and build a better credit profile can help improve financial readiness, not detract from it.

Installment loans versus credit cards

MYTH:

Low interest credit cards are better choices than installment loans because of the lower interest rates.

TRUTH:

Credit cards and other credit choices are not always a consumer's best option. With credit cards, there can be hidden costs such as late fees, overdraft/charge fees and rollover charges that can quickly drive up the cost of borrowing. Understanding these costs is a key to understanding what the best deal is when choosing financing options. Sometimes a lack of disclosure can contribute to consumer myths as well. Many advocates promote a singular form of price shopping—interest rate or annual percentage rate—when in fact the term of the loan becomes a critical determinant of actual COST! These advocates are quick to point out that a 90-day $300 loan at 34.95% is a bad decision, while borrowing $300 at a cost of $17.34 is a much better deal—only to learn that these represented the same loan. Credit card minimum monthly payments often cover little more than the periodic interest—it can take literally years to pay off a credit card balance. Without a fixed term, an important component of installment loans, the borrower does not have a plan to get out of debt. Consumers should obtain as much information as possible before selecting any form of credit and before determining whether a revolving account or an installment loan is better for their situation.