Explain: By the end of this session, you will be able to determine how to manage financial difficulties and identify high-risk/high-interest rate loan products.

Transition Statement: Let’s begin by discussing how to manage financial difficulties.

Explain: Financial difficulties can happen to anyone. How homeowners cope with these situations will affect their financial well-being.

It is necessary to determine whether the financial crisis is temporary or long-term.

Question: What are examples of a temporary crisis? Long-term crisis?

Instructor’s Note: Bullets will appear after discussion upon a second mouse click.

Explain: An example of a temporary financial crisis is an unexpected car repair or medical bill. A long-term financial crisis might result from the loss of a job or the loss of a spouse.

Explain: It is not recommended that the homeowner apply for other sources of debt to pay off current debt. Doing this could easily snowball into a much larger problem resulting in creditors calling to collect the debts. The homeowner could consider contacting a reputable consumer credit counseling agency and/or local housing nonprofit organization for help.

Question: Where might you go in the area for help?

Instructor's Note: One option in the City of Las Cruces is to contact the Consumer Credit Counseling Agency at (575) 527-2585.

Explain: If a homeowner is having financial difficulties, one of the first things to do is establish an emergency budget. This is different from a regular budget because you only include absolutely essential costs. This will help you to determine where the money leaks are and to prioritize your debts. For more information on how to establish a budget, refer to the Managing Money module.

Question: Which bills should you pay first?

Explain: When determining which bills to pay first, pay more attention to any debts that are secured by collateral or debts for which the lender can take immediate action - causing you to lose something on which you have been making payments, but do not yet own. This can include, but is not limited to, your house or car. Your utilities are also important because the provider can shut off your service.

Explain: Avoiding financial difficulties can save a lot of heartache. However, if you find yourself in a difficult financial situation, you should consider these recommendations. First, realize that it may not be possible to make all your payments to your creditors on time. This list may assist you in determining which bills to pay first.

• Household Necessities: Includes items such as food, health expenses and any other necessary items needed to live on a daily basis.
• Housing Expenses: Includes your mortgage payment. Not making your payment could mean losing your shelter.
• Utilities: These are a necessity for everyday life. Check with your local utility company to see if there are any programs to help homeowners during hardships.
• Car Loans: If you do not make your car payment and there is no public transportation, you may not have a way to get to work.

Transition Statement: In addition to financial crisis, getting into high-risk/high-interest rate loan products can cause financial struggles.

Explain: The financial industry offers many options when it comes to getting access to money. When you are experiencing financial difficulties, it is easy to be tempted by the many loans that are advertised on the radio, television and billboards. Unfortunately most of these have high interest rates (15% to 500%+) and will only add to your financial difficulties in the long term. Traditional lenders will consider your overall financial position, and if you are financially overextended, they will be less willing to loan you money. If a lender is willing to loan you money, it may come at a higher cost and could cause a financial burden.

People sometimes borrow from one source to pay another financial provider. This is not recommended because you continue to obtain debt rather than paying it off. However, some lenders offer 0% interest for the first few months, and you may be able to avoid some interest by transferring balances every few months.

In some cases, these lending companies work in conjunction with one another and share credit information on people who are using their services. When an individual is identified as a potential client, the lending companies may refer customers to each other. A company that specializes in home equity loans may solicit the option to consolidate using the customer’s home as collateral. Consolidating loans may look appealing because of the lower monthly payments and sometimes lower initial interest rates. However, the debt is then secured by your property, and if you cannot pay your monthly payments, you may face a major financial crisis.

Explain: The following types of loans are marketed specifically to people in financial difficulty. The options below are usually offered at a much higher cost of accessing funds than the rates of a traditional lending institution. This is because these financial organizations usually have more flexible guidelines to qualify their customers. Although a customer cannot afford a loan, these organizations will still loan the money, putting customers at serious financial risk. Some institutions are able to offer these loans through loopholes in the law.

Explain: Let’s begin with Tax Refund Anticipation Loans (RALs).

Question: Can anyone explain what these loans are?

Instructor’s Note: Definition and bullets will appear after participant response upon a second mouse click.

Explain: RALs are short-term cash advances against a customer’s anticipated income tax refund.

RALs are offered at high interest rates, ranging from about 40 percent to more than 700 percent annual interest rate. They speed up the refund process by as little as one week, compared to what consumers can expect by filing online and having their refunds deposited directly into their banking accounts.

Explain: Next is Overdraft Loans (also called "bounce protection" plans) which are offered by banks to their account holders. In exchange for covering account overdrafts up to a set dollar limit, banks charge bounced-check fees ranging from $20 to $35 for each transaction. For example, if you only have $10 in your account, and you write a check for $20, the bank would pay the $20 and then charge you an additional fee of $20 to $35. Now, the $20 item, for which the check was written, will actually cost you $40 to $55. Some banks also charge a per-day fee of $2 to $5 until the consumer’s account has a positive balance. So until you deposit at least $30 to $45, plus the $2 to $5 for each day you are overdrawn, you continue to be charged a daily overdraft fee.

In addition to writing checks, customers can borrow against their bounce protection limit using their debit cards and making ATM withdrawals.

Through a loophole in Federal Reserve rules, institutions do not have to consider these bounced-check programs as extensions of credit, and therefore are not required to disclose that they are charging people up to 1,000 percent interest on the loans.

Question: Does anyone have a personal experience they would like to share concerning overdraft loans or fees they have been charged?

Explain: Rent-to-Own companies rent merchandise, although the structure of the transaction is more like a loan because of the interest and credit insurance involved.

These businesses charge a weekly or monthly rent for a stated period, after which the property is owned by the consumer.

The store does not have to report how much it is charging in interest. If a borrower is late with a payment, there is no legal limit on how much interest the store can charge in finance charges, although the company usually repossesses the rental property. Under a typical rent-to-own contract, a consumer may agree to rent a television for $100 a month for two years, after which he will own the TV. The $100 a month looks appealing and affordable, but the consumer does not realize that over two years, he will pay $2,400 to purchase a $500 television.

Question: What might be a better option than Rent-to-Own?

Explain: An alternative to rent-to-own is to save for the purchase or use a lay-away program. A lay-away program allows you to make payments on your purchase over a period of time, and when you have paid for the product you own it without the extra cost of high interest rates and fees. So, again, the $100 a month could go toward a $500 television, and in five months you would have a new TV without having to pay any interest. The biggest difference in these options is patience. Many people who use Rent-to-Own loans want the television TODAY!

Explain: Credit cards have become a common form of currency for millions of Americans.

While some cardholders use their credit for occasional purchases, many families have come to rely on credit to weather economic downturns or simply to make ends meet. College students and other minors also have become attractive marketing targets for cards that contain hidden transfer charges, hefty late fees and rising interest rates. The credit card industry has identified its ideal customers as those who no longer pay off their balances, but instead grow increasingly indebted to their creditors by making low minimum monthly payments.

If you choose to use credit cards, the best option is to limit the number of credit cards you have and the credit limits on the cards. Also, do not allow a credit card company to continually increase your credit limit. Instead, determine the amount you think is appropriate for your budget and keep your card set at that limit. If you use your credit card, pay the bill in full each month.

If you are considering getting a new credit card, read all the fine print. Credit card companies may offer a low introductory rate and in a few months raise the interest. Others may offer you a competitive rate, but as soon as you make a late payment on any of your other credit responsibilities (including utilities), the rate will be raised.

For more information regarding credit cards, refer to the Managing Money module of this curriculum.

Explain: Payday lending (sometimes called cash advance) is the practice of using a post-dated check or electronic checking account information as collateral for a short-term loan. For example, if it is Monday and you get paid $200 on Friday, you can visit one of these companies on Monday and borrow $200. On Friday, you are then responsible for paying back the $200 plus interest.

To qualify, borrowers need only personal identification, a checking account and income from a job or government benefits, such as Social Security or disability payments. Research shows that the payday lending business model is designed to keep borrowers in debt, not to provide one-time assistance during a time of financial need.

As an alternative, consider starting a savings account and adding to it on a regular basis. Even if you are able to add only a small amount some months, every dollar will help if you ever find yourself in a situation when you need money.

Explain: When a consumer takes out a car title loan, the consumer’s automobile is used as security for the loan.

The loan amount is based on a percentage of the vehicle’s value, usually around 25 percent of the book value. For example, if your automobile’s book value is $10,000, you would be eligible for up to a $2,500 title loan. If you borrow $1,000 for a period of only 14 days, your total payback could be $1,250 which is equivalent to 659.71 percent APR.

Instead of using car title companies, consider going to your local banking institution. Your banking institution may allow you to borrow a higher percentage of the value of your car versus car title companies. Best of all the rate and monthly payment should be considerably lower.

Explain: Finance companies are institutions that make personal loans and, in some cases, real estate loans. These institutions usually offer the same loan products as local banks or credit unions with different interest rates and insurances options. Finance companies typically have less strict guidelines, which causes their interest rates to be considerably higher.

When considering your loan options, first go to your local bank or credit union. These institutions offer a variety of loan programs that may fit your needs. Although they usually have stricter guidelines, there may be a short-term loan program that will help you establish your credit and allow you to get a loan with a lower interest rate at a later date.

Lesson Summary: Congratulations! You have completed “Financial Difficulties and High-Risk Loan Products” in this Being A Responsible Home Owner series of classes.

Today we have determined how to manage financial difficulties and identified high-risk/high-interest loan products.

Question: Are there any questions?