PEWAUKEE, Wis., Dec. 20 /PRNewswire/ — This holiday season, Wisconsin credit unions are warning consumers to steer clear of a new type of predatory loan that aims to provide a quick solution to holiday spending woes, but might leave you with a long-term problem.
Holiday Refund Anticipation Loans (RALs) are short-term loans that are secured by a tax payer’s expected refund and marketed through year’s end by paid tax prep firms. However, since tax payers won’t receive W-2 forms until January, the Holiday RAL lender will reference your most recent pay stub and only estimate your tax refund. RALs can also carry excessive fees that translate into triple-digit annualized interest rates and add up quickly, with the consumer often unaware of the total cost.
“If your refund is smaller than expected, you may not have the funds to pay back the loan, which could lead to more fees and eventually damage your credit,” says Brett Thompson, President & CEO of The Wisconsin Credit Union League, the trade association for more than 270 of the state’s not-for-profit, member owned financial institutions. “Plus, it really doesn’t make sense to lose hundreds of dollars to borrow your own money.”
Instead, Thompson suggests consumers use credit unions as an alternative. Unlike many for-profit banks, not-for-profit credit unions offer loans as small as a few hundred dollars that won’t charge excessive fees and interest rates. Credit unions also provide consumers with savings opportunities and offer free financial counseling to improve their members’ overall financial position. While these services do not drive profits, credit unions offer them as part of their mission as cooperatives.
“The purpose of not-for-profit credit unions is to serve members, not make profits,” notes Thompson. “Because of their unique structure, credit unions are able to provide consumers with affordable alternatives to financially draining products like RALs.”
Through an initiative called REAL Solutions, Wisconsin credit unions statewide are developing lower-cost alternatives to a range of services that for-profit financial providers have used to gouge consumers, including short term “paycheck advance” services, check cashing, wire transfers and more.
Thompson says credit unions’ goal with REAL Solutions is to meet consumers’ immediate needs for transaction services while moving them through the steps of opening basic deposit accounts, building creditworthiness with small loans, and — over time — building wealth. Wisconsin credit unions’ REAL Solutions effort was recognized with a first-ever, 2006 Governor’s Award for Financial Literacy, an honor that acknowledges innovative financial literacy efforts that improve the financial health of Wisconsin’s citizens.
Source: The Wisconsin Credit Union League
