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What consumers should know about same-day loans

Published:Sunday | September 7, 2014 | 9:00 AM

Oran Hall, Personal Financial Adviser

Same-day loans are a quick and convenient means of sourcing funds for a wide range of personal expenses relating to health, education, family emergencies and motor vehicle expenses.

Consumers should recognise that this business is not regulated and should approach with caution.

Same-day loans, also called payday loans, can be quite attractive for these reasons: they may not require any collateral and, when they do, a wide range of items, such as personal items, motor vehicles, furniture and appliances, are accepted; the monthly, weekly or biweekly repayment options are convenient; the processing time is short; and the requirements are usually less than stringent for other loan facilities.

The Consumer Affairs Commission (CAC) outlines several steps that consumers should take to protect themselves as they enter into these arrangements.

Consumers should exercise care before signing a contract that will bind them to its terms. They should find out if lenders can change the interest rate agreed to after the agreement is signed and if the lender will consult them before changing the interest rate.

They should determine if the interest rate is on the add-on basis or on the reducing balance basis. The latter is cheaper. Because the rate of interest is generally quoted on a weekly or monthly basis, it is important to know the annual percentage rate.

The CAC further recommends that consumers get a full understanding of the terms of the loan. They should, for example, get a full understanding of all processing fees and insurance costs. In short, they should know the full cost of the loan.

They should ask for the rules relating to the seizing of goods put up as collateral.

Although borrowers keep possession of the goods, they effectively become the property of the lender who may thus seize them if the borrower fails to make the agreed payments. Where provision is made in the contract, the lender has the right to enter the premises where the goods are stored to examine their condition.

Consumers should know their rights relating to the seizure of goods offered as collateral. Contrary to common practice, it does not follow that all such goods should be seized regardless of the amount owed in the event of default.

Consumers should ask certain important questions before entering into a contract with these lenders. For example, they should ask about the processes required for getting a loan and should also ask where goods seized for non-payment of the loan will be kept as this will affect the convenience and cost involved in reclaiming them if the funds for which they were seized are ultimately paid.

If unfamiliar with financial terms, borrowers should ask the customer service representative or a trusted third party to explain them to their satisfaction.

Similarly, they should know all they can about their rights. The CAC explains that death and disability do not release borrowers from their financial obligation thus making it prudent to have insurance in place to meet such obligations and thus free their estates or guarantors from responsibility for these commitments.

Guarantors, the CAC points out, should be very clear about their rights and obligations. They should know that when the borrower defaults the lender has the right to treat the balance as being due immediately, meaning that they can be immediately called upon to pay all outstanding amounts.

Because the responsibilities of guarantors continue after their death, the amount owing will become binding on their estates. When the lender makes a demand, the interest rate that applied to the borrower also applies to the guarantor who can be sued if the sums owing are not paid.

Additionally, consumers should not borrow if they do not have enough money to make the regular principal and interest payments. They should read all documents before signing them and refrain from signing documents that have blank spaces to be filled in after they have signed. They should not allow themselves to be pressured into signing any documents, nor into signing over their property to anyone and should keep careful record of amounts paid, all receipts and statements.

It is important to weigh the benefits of same day loans against the cost before making a commitment. Considering their cost, they should be used primarily to meet short-term needs.

Although unforeseen challenges may present themselves, a good way to reduce the need for such loans is to establish and maintain an emergency fund, which can be done gradually over time.

Oran A. Hall, a member of the Caribbean Financial Planning Association and principal author of 'The Handbook of Personal Financial Planning', offers personal financial planning advice and counsel.finviser.jm@gmail.com