Here’s a look at three common resources for strapped borrowers:
■ Payday loans. Their widespread presence makes payday lenders easy to turn to in a pinch; about 19 million people did so last year, according to industry figures.
Consumers give the lender a postdated check for the amount of the loan plus a fee, usually $15 or so for every $100 borrowed. The lender holds the check for about two weeks, at which point the money is repaid or the check is cashed. In some states the loan can be rolled over for another fee.
The fee is easy to understand, on the surface. But translate that average fee on a $100 loan into an annualized rate, and you’re looking at interest of 391 percent. This passes muster even under the new law, since there’s still no rate cap.
■ Prepaid cards. The cards offer a vital convenience for those who don’t have credit or debit cards. They can be used to pay bills online, book airplane tickets, and provide a sense of security that cash may not.
Users load them with cash and replenish as needed. The cards carry a Discover, MasterCard, or Visa logo. It costs as much as $29.95 just to buy one.
The fees vary wildly. There are monthly maintenance fees, ATM withdrawal fees, balance inquiry fees, bill pay fees, and inactivity fees.
Not all cards are so fee-heavy. But even one of the more affordable cards costs $4.95 to buy, and charges a $5.95 monthly maintenance fee unless certain usage requirements are met.
Issuers aren’t required to provide the same legal protections as for credit and debit cards, such as limited liability if they’re stolen. The Federal Reserve is studying whether to change that.
■ Subprime credit cards. They come larded with fees, despite credit lines that are often only a couple hundred dollars.
Starting yesterday, fees in the first year will be capped at 25 percent of a card’s credit limit. But the issuers of subprime cards have already adapted. Because there’s no cap on interest rates, the APRs on subprime cards have reached as high as 79.9 percent. And so long as cardholders are given 45 days’ notice, they could climb higher still.
First Premier, one of the biggest players, found a way around the cap on fees. It now charges a $45 processing fee before a card is issued.
Candice Choi is a personal finance writer for the Associated Press.
