Of course, the upside of cosigning a loan is that you can help a loved one get a loan they otherwise couldn’t get on their own, enabling them to purchase a home or save interest with a lower rate. And, if the primary account holder manages the account responsibly, you might see a slight improvement in your own credit.
While it’s tempting to rush to help a friend or family member, you should first understand your obligations and know what might happen if the person you’re helping fails to repay the loan. The big downside to cosigning someone else's loan is that you agree to pay the mortgage if the primary borrower doesn't. It’s risky for your credit, and potentially your relationship with the borrower, to guarantee a loan.
The advice for those considering cosigning a loan for a family member or friend is usually not to do it. And if you do, be sure you understand the consequences if something goes wrong.
So, before you commit to helping your son, daughter, or other loved one by becoming a cosigner on a mortgage loan, consider all of the pitfalls and learn about:
Being a cosigner on a home loan—or any loan—is a status that carries no rights at all. While you’ll share liability for the cosigned mortgage with the borrower, you most likely won’t get an ownership interest in the property. So, you risk having to repay the loan without benefitting from living in the home or owning a part of it.
As far as responsibilities, you’re 100% responsible for the complete repayment of the loan. Before you cosign, ensure you’re comfortable covering the mortgage payments if the primary borrower can’t.
If the primary borrower makes the loan payments on time, that information might or might not show up on your credit report. It depends on the creditor. Not all of them report to cosigners' credit reports when payments are made on time.
Cosigning a loan could help your credit if the creditor reports that the primary account holder manages the account responsibly and makes on-time payments. And the new account adds to your credit mix. (Having different types of credit, like mortgages and credit cards, can help your credit scores.) But even if the creditor reports the payments to the major reporting bureaus, you’ll likely only get a slight benefit to your credit scores. Because you were a worthy cosigner, you probably don’t need more positive notations on your credit report to boost your scores.
In fact, you'll probably see a temporary reduction in your credit scores when the lender pulls your credit before approving the mortgage loan you're cosigning. This hard inquiry will ding your credit, and so will the increase in your overall debt load. Credit bureaus factor in loans you cosign for as a debt obligation when figuring your credit scores. Cosigning a mortgage loan can raise your total debt balance and reduce your credit scores accordingly.
Also, knowing about your liability on a cosigned debt, other lenders might refuse to make additional loans to you because you might appear overextended. So, before you agree to cosign a mortgage loan, consider whether you plan to buy a house, car, or another item on credit within the period that the borrower is paying off the mortgage, which could be decades.
If the primary borrower pays late or, even worse, defaults on the loan, your credit will take a hit. The borrower might not be too concerned about negative credit reporting because they already had bad credit (obviously, otherwise, a cosigner wouldn’t have been necessary).
As a cosigner, not only will your credit scores fall, but you’ll also be liable for repayment of the debt, including late fees and collection costs. The lender can come after you as though you were the primary borrower. The lender might contact you and tell you that the loan is delinquent. If you don't bring the loan current or work something out, like a repayment plan, the lender might take further collection steps against you and the primary borrower, including conducting a foreclosure.
And, depending on state law, the lender might sue you for a deficiency judgment if the foreclosure sale doesn't bring in enough money to repay the loan. Eventually, the lender might be able to garnish your wages or levy your bank account to pay off the debt.
You'll need to make the necessary payments to get the loan out of default to protect your credit. Then, you'd want to deal with the main borrower to fix the problem. Here are a few things to think about:
If you end up paying the lender voluntarily or because you got sued after the primary borrower failed to pay, you might need to file a suit against your family member or friend to get your money back. Suing a family member or a friend can destroy what was formerly a good relationship. Saying "no" to cosigning in the first place can be hard, but it might save you a lot of stress down the road.
Also, while getting a judgment against your family member or friend probably won’t be difficult, getting them to pay up might be. After winning a lawsuit, you still have to collect the money awarded in the judgment—the court won't help you with this. You might need to hire a debt collection attorney or law firm to assist you.
If you decide to cosign someone's mortgage loan, make sure you fully trust the primary borrower. You’ll want to keep the lines of communication open between you and the borrower so you can discuss financial difficulties before they become a problem. Ask the primary borrower for access to the loan account and regularly keep track of the payments, ensuring they’re paid on time. You can also ask the lender to notify you immediately if the primary borrower misses a payment.
It’s also a good idea to prepare a written agreement between you and the borrower upfront so that you both understand expectations and what will happen if the primary borrower doesn’t pay. This contract should include details about:
It’s also a good idea to keep an amount equal to a monthly payment or two in your savings account just in case you need to cover a payment.
You could consider alternatives to cosigning, like:
Also, keep in mind that a local housing assistance program or affordable homebuyer program might be available to help the home buyer, keeping you out of the picture.
The risks of cosigning a mortgage loan aren't worth it for many people. If, however, you're still thinking of guaranteeing repayment of someone else's home mortgage loan after evaluating all the downsides, consider talking to a real state attorney or debt relief attorney.
An attorney can put the terms of the arrangement between you and the primary borrower into a written agreement before you cosign the loan, advise you further about the potential consequences, and answer any questions you have.
]]>Lawsuit loans can tide you over if you can't cover living expenses and other costs during your lawsuit and might provide you with time to negotiate a favorable settlement. But they're not always a wise choice. Here's why:
Also, consumer advocacy groups have strongly opposed lawsuit lending or have actively proposed regulating it on behalf of consumers. In their push for more regulation, these consumer groups have found themselves aligned with entities not necessarily known for their consumer advocacy, including insurance companies and business groups like chambers of commerce. These pro-business groups oppose lawsuit loans because of their concern that this kind of lending encourages litigation by making it easier for plaintiffs to hold out for higher settlements.
Lawsuit funding is a product offered to plaintiffs who expect to settle or win a judgment in a lawsuit. Here's how it works.
After you file a personal injury lawsuit, you apply for the loan with a lawsuit funding company. The company evaluates your case to determine how much you can expect to get if you win or negotiate a settlement. (The vast majority of personal injury cases are settled before trial.) The lender offers you a sum of money immediately.
In exchange, you agree to pay the lender that sum of money (the principal) and a “funding fee” out of the proceeds of your settlement or judgment. Usually, you don't have to make any payments before you settle the case or get a judgment. The lender gets paid from the proceeds of the lawsuit judgment or settlement.
The “funding fee” can run between 2% to 4% per month. That might sound reasonable, but it equates to annual percentage rates of 27% to 60% or more. Considering that your lawsuit could take years to resolve, you might pay back double or triple the money you borrow.
The loan is paid from the judgment or the settlement funds after other expenses are covered. When you reach a settlement with the defendant or obtain a judgment in court, certain expenses will be paid off the top. These expenses include:
When all other expenses are paid, the lawsuit lender gets paid from the remainder.
You sue XYZ Insurance Company for $100,000 because of injuries you suffered in a traffic accident caused by one of the company’s insured drivers. A lawsuit lender evaluates your case and offers to lend you $25,000 at 3% per month.
A year later, your case settles for $100,000. The attorneys' fees, litigation expenses, and medical liens total $50,000. Of the remaining $50,000, you must pay the litigation lender the principal of $25,000 plus its funding fee of approximately $12,500. You then receive the remaining proceeds of $12,500.
$100,000 Settlement amount
- $50,000 Attorneys' fees, litigation expenses, and medical liens
- $25,000 Principal repaid to lawsuit lender
- $12,500 Funding fee owed to lawsuit lender
$12,500 Remainder to you
On the plus side for the consumer, if you lose your case, you don't have to repay the loan. This is a risk that the lender takes and one of the reasons the cost of a lawsuit loan is higher than other types of loans. Likewise, if you settle for less than expected, you will not have to pay more than the amount of your settlement.
Let's say the case in Example 1 takes two years to settle instead of one. You will owe the lender the principal of $25,000, but the funding fee will balloon to $32,000. In that case, the lender will receive the principal of $25,000 and the remaining $25,000 of the settlement. That leaves a deficit of $7,000. You won't get anything from the lawsuit settlement, but you don't have to repay the $7,000 to the lawsuit lending company.
$100,000 Settlement amount
- $50,000 Attorneys' fees, litigation expenses, and medical liens
- $25,000 Principal repaid to lawsuit lender
- $32,000 Funding fee owed to lawsuit lender
-$7,000
Below are the two main advantages of lawsuit cash advances.
Lawsuit loans can provide much-needed breathing space if you can't cover living expenses, mortgage payments, car loan payments, and medical bills during your lawsuit.
If you're depending on the settlement or award to provide income or pay for needs like medical bills, taking out a lawsuit loan might allow you to take more time considering settlement offers. As a plaintiff, your goal shouldn't be to prolong the litigation but to obtain a fair result.
If a lawsuit loan helps relieve financial stress, you might find that you and your attorney can take more time to negotiate with the defendant. If the defendant isn't offering a fair settlement, a lawsuit loan might give you the financial wherewithal to go to trial.
Even if you need cash, a lawsuit loan might not be a wise choice for you. Below are some of the main cons to taking out a lawsuit cash advance.
When you pay the lender out of the settlement or judgment proceeds, you'll pay back the principal you borrowed plus a funding fee or interest payment that could be double or triple what you borrowed from the lender. But you won't have to pay more than your settlement or award.
It is not unusual for personal injury cases to take months or even years to settle or come to trial. Again, the interest rates on a typical lawsuit loan can run between 27% and 60% a year, comparable to some payday loans. As shown in the examples above, on a $25,000 loan, the interest can cost you $12,500 or more in just one year. Because the interest is usually compounded monthly, if the case takes two years to settle, you'll pay back a whopping $32,000 in addition to the $25,000 you borrowed.
You will save yourself considerable money in the long run if you can avoid taking out a lawsuit loan in the first place. Consider other resources, like insurance proceeds, disability payments, or even friends and relatives. It might be worthwhile to approach your credit union or neighborhood bank for an installment loan. Borrowing against the equity in your house or your 401(k) account should probably be a last resort. They might be a less expensive alternative in the short run, but you risk losing your house to foreclosure or your retirement if you can't pay back the loans as agreed.
Because the lending company is taking a substantial risk, it only lends when it is confident that you will win or settle your case. If you lose, you won’t have to pay the loan back. If you win less than the lending company expected, you might not have to repay the entire amount.
So, the lender will want to ensure that your case is likely to pay off handsomely. Because lawsuit lenders are picky about the cases they accept, plaintiffs often report having to apply to five or six different companies before they find one interested in funding their case.
Unlike other types of lending, the federal government doesn't regulate lawsuit loans, and only some states have put into place consumer safeguards. The lawsuit lending industry argues that lawsuit funding is not a loan and that the usual laws and regulations applying to loans shouldn't apply to them. According to the lawsuit funding industry, lawsuit loans aren't actually "loans" because they are nonrecourse, meaning plaintiffs don't have to repay the money if they lose the case. Instead, they characterize the transactions as nonrecourse purchases of a portion of the proceeds of a potential future case judgment or settlement.
Using this argument, lawsuit lenders have convinced some state legislatures not to regulate their products as if they were traditional loans. However, certain courts and some states require lawsuit lenders to comply with state lending laws or otherwise regulate lawsuit lenders. For example, a 2015 decision by the Colorado Supreme Court determined that these kinds of agreements are, in fact, loans and subject to state lending laws. To find out about lawsuit lending laws in your state, if any, talk to an attorney.
In addition, few restrictions exist on how much lawsuit funding companies can charge for their services and few requirements as to how interest rates and other terms must be disclosed. So, it's problematic to find and compare rates and other terms or find the disclosures you need to make an informed decision on the best loan or lending company for you. Even the vocabulary might differ from website to website. One company might advertise its product as a "loan," while another will call it an "advance."
Without widespread regulation of the lawsuit lending industry, it's hard to know which companies are treating their customers fairly. With little government or industry oversight, it might be even more difficult to get satisfaction if you think you've been treated unfairly. Looking for a company that subscribes to a list of best practices or rules governing the client relationship might be a start. Services like the Better Business Bureau might provide insight with reviews and complaints.
Because lawsuit loans have few consumer protections, you need to be extra vigilant if you're considering this type of funding. Understand what the loans are, carefully consider whether such a loan is a wise financial decision in your situation, and if you decide to look for a loan, shop carefully.
]]>Getting your report from one of these agencies involves a different process than requesting a credit report from Equifax, Experian, or Transunion.
In addition to specialty credit reports, another kind of credit report—called an "investigative report"—contains personal information. Insurers and employers typically use these reports.
In addition to your yearly free credit report from each of the major nationwide credit reporting agencies, you may also get a free credit report each year from each of the nationwide specialty credit reporting agencies. Though, getting your report from one of these specialty agencies involves a different process than if you're requesting a report from Equifax, Experian, or Transunion, which you can do by going to www.annualcreditreport.com.
To get a specialty credit report, you’ll have to contact each agency individually.
A few of the main nationwide specialty credit reporting agencies are Lexis Nexis Personal Reports, Medical Information Bureau, ISO, Telecheck, ChexSystems, and Certegy. You can get a list of most credit reporting agencies and contact information for those agencies, categorized by type—like medical, employment, tenant, insurance, and so forth—from the Consumer Financial Protection Bureau.
Not all of the companies on the list provide free reports. If a company does provide one free report per year, the list will say so.
Investigative reports include personal information that is of interest to insurers and employers. Unlike regular credit reports and specialty credit reports, investigative reports include information on your:
This information comes from interviews with third parties, such as your neighbors, co-workers, or friends. Companies that prepare investigative reports often call them “background checks.” Because an investigative report could lead to a denial of insurance or a job, or damage a person’s reputation in the community, extensive rules apply to these reports. The rules limit who may request this kind of report and when.
A slew of rules apply to regular credit reports, limiting who can request them and when. But because the information in investigative reports is personal and invasive, additional rules apply.
If a business or person requests an investigative report, it must:
For example, businesses that procure employees for prospective employers, like headhunters, must get the consumer’s consent before conducting the investigation and again before telling the employer the results.
However, if an employer requests a report to investigate employee misconduct or violations of law (rather than creditworthiness, standing, or capacity), it doesn't have to give you advance notice of its request for the report.
]]>Unfortunately, a credit reporting agency might respond that the creditor reporting the information verified its accuracy and completeness. Then, that information will remain in your file.
If you dispute an incorrect item in your credit report but the credit reporting agency doesn't fix it, you’ll have to take additional steps to remedy the problem.
You can:
If the credit reporting agency refuses to change your report—and you still believe the information is inaccurate or incomplete—you’ll need to take more aggressive action.
Here are some ideas to help you in your efforts to clean up your credit report.
Contact the creditor that furnished the incorrect information, and demand that it tell the credit reporting agency to remove the data from your report. You can use Nolo’s Request to Creditor to Remove Inaccurate Information or write your own letter. If you get a letter from the creditor agreeing that the information is wrong and should be deleted from your credit file, send a copy of that letter to the agency that made the flawed report.
If you already contacted the creditor directly, it doesn’t have to deal with this dispute again unless you supply more information. But if you escalate your complaint to the president or CEO, for example, because you believe the dispute was not adequately investigated and demonstrate a solid basis for your belief, the company is likely to respond.
If the company can’t or won’t assist you in removing the inaccurate information, contact the credit reporting agency directly. Credit reporting agencies have toll-free numbers to handle consumer disputes about erroneous items in their credit files that aren’t removed through the normal reinvestigation process. Go to the Equifax, Experian, and TransUnion websites for contact information for these three nationwide credit reporting agencies.
If you have more information that backs up your claim, you can submit a new dispute to the credit reporting agency. Be sure to provide fresh, relevant information. If you dispute the same error without giving the agency any additional information, it will probably decide that your dispute is frivolous. Then, it doesn’t have to investigate the matter further.
You can file a complaint about a credit reporting agency with the Consumer Financial Protection Bureau (CFPB). The CFPB will forward your complaint to the agency and try to get a response. If the CFPB thinks another government agency would be better able to help you, it will forward your complaint to that agency and let you know.
If the creditor that furnished the incorrect or incomplete information fails to revise it or advise the credit reporting agency of a correction (or if it advises the credit reporting agency of the adjustment but then reports the erroneous information again later), you may file a complaint with the federal agency that oversees that type of financial institution. The CFPB also oversees many types of financial agencies. So, you can file a complaint there too.
If you aren’t sure which agency to contact, start with the CFPB, which will likely forward your complaint to the appropriate agency. Generally, the CFPB won’t represent you individually. But it could send an inquiry to the company, and if there are enough complaints or other evidence of wrongdoing, it might take legal action.
Some states have laws that apply to credit reporting agencies or creditors furnishing information to these agencies. File a complaint with your state’s attorney general or consumer protection agency.
After all, they write the laws and need to know when problems arise with those laws or their enforcement. Your congressperson can also call the CFPB or FTC and ask it to investigate.
If you were seriously harmed—say, the credit reporting agency continued to give out incomplete or inaccurate information after you requested corrections—you might consider filing a lawsuit. Under the Fair Credit Reporting Act (FCRA) (15 U.S.C. § 1681 and following), you may sue a credit reporting agency for negligent or willful noncompliance with the law within two years after you discover the harmful behavior or within five years after the harmful behavior occurs, whichever is sooner. Depending on the violation, you might be able to win actual damages, statutory damages, punitive damages, court costs, and attorneys’ fees.
You might also consider suing the creditor that supplied the inaccurate information. But these types of lawsuits are complicated, and the FCRA provides creditors with many ways to avoid liability. You’ll need to consult a lawyer to pursue this type of lawsuit.
You have the right to add an explanatory statement to your credit report. Once you file a statement about the dispute with a credit reporting agency, the agency must include your statement, or a summary of it, in any report that includes the disputed information.
If the agency assists you in writing the explanation, it may limit your statement to 100 words. Otherwise, there isn’t a specific word limit. But it’s a good idea to keep the statement very brief. That way, the credit reporting agency will likely use your unedited comment.
If you need help fixing your credit report, consider talking to a consumer protection attorney or debt settlement lawyer who handles credit issues. A lawyer can help you enforce your rights against an agency or creditor that violates the FCRA.
]]>At a pawn shop, you leave your property and, in return, the pawnbroker typically lends you approximately 25% to 60% of the item’s resale value. The most commonly pawned items are jewelry, electronic and photography equipment, musical instruments, and firearms.
The average amount of a pawn shop loan is about $75–$100. You're given a short time to repay the loan, typically a few months, and are charged interest, often at a very high rate.
Here's why using a pawn shop is almost always a bad idea:
Although you borrow money for only a few months, paying an average of 10% a month interest means that you're paying an annual interest rate of 120%. Interest rates may vary from 12% to 240% or more, depending on whether state law restricts rates pawn shops can charge.
You might also be charged storage costs and insurance fees.
If you default on your loan to a pawn shop, the property you left at the shop to obtain the loan becomes the property of the pawnbroker. You're usually given some time, typically 30 to 60 days, to pay your debt and get your property back. If you don’t, the pawnbroker can sell it.
In about a dozen states, you're entitled to the surplus if the sale brings in money in excess of what you owe on the loan, storage fees, and sales costs. But don’t count on getting anything.
To learn about safer ways to get control of your finances, see Options If You Can't Pay Your Debts. Consider consulting with a debt-relief lawyer to get more information if you need help deciding which course of action is best.
And, if you have a lot of debts you can't pay, you might also want to consider filing for bankruptcy. In that situation, you'll want to talk to a bankruptcy lawyer.
]]>Lawsuit funding companies heavily advertise lawsuit loans. But don't jump at the first company you encounter. Lawsuit loans are very expensive—make sure you understand the costs, decide if you really need one, and then shop around to find the lawsuit loan with the best terms.
Lawsuit loans are expensive. When you pay the lender out of the proceeds of your settlement or judgment, you'll pay back the principal you borrowed plus a funding fee or interest payment that might be double or triple what you borrowed from the lender. You won't be required to pay more than your settlement or award.
It's not unusual for personal injury cases to take months or years to settle or come to trial. The interest rates on lawsuit loans run between 27% and 60% a year—rates that are comparable to payday loans. On a $25,000 loan, the interest can cost you $12,500 or more in just one year. Because the interest is usually compounded monthly, if the case takes two years to settle, you'll pay back a whopping $32,000 in addition to the $25,000 you borrowed.
You'll save yourself considerable money in the long run if you can avoid taking out a lawsuit loan in the first place. Before you turn to a lawsuit loan, consider other resources like insurance proceeds, disability payments, or even friends and relatives. It might be worthwhile to approach your credit union or neighborhood bank for an installment loan—you'll likely end up paying much less over time. Be careful before borrowing against the equity in your house or your 401(k) account; these should probably be a last resort.
Because the lending company is taking a substantial risk (it won't get repaid if you lose the case or settle for less than expected), it will only lend if it's confident that you'll win or settle your case for a handsome amount.
When you apply for a lawsuit loan, the lender will contact your attorney to gather as much information as possible in order to evaluate your case. This process could take weeks and will require the cooperation of your attorney. It's likely you'll need to follow up with the lender and your attorney to ensure that the lender receives the documentation needed to make a decision.
If you're a personal injury plaintiff, it's likely you've received lending offers in the mail and seen numerous commercials on TV and the Internet. Finding a reputable company can be daunting. Here's where to start.
Once you've received several recommendations, contact each litigation funding company and do the following:
Above all, keep in mind the following: For the most part, state and federal agencies don't regulate litigation funding companies in the same way that they regulate banks, credit unions, and even storefront finance companies. There are few restrictions on how much they can charge for their services and few requirements as to how interest rates and other terms are disclosed.
]]>Below you can learn how a structured settlement works and review some of the things you should consider when deciding to take a structured settlement or a lump-sum payment if you win or settle your lawsuit.
If you agree to take your award as a structured settlement, instead of receiving one large amount from the plaintiff, you will receive periodic payments over the course of a fixed number of years. For example, if you win $500,000, your structured settlement might require the defendant to pay you $50,000 every June for ten years.
You can design a structured settlement so that it provides money when you need it most. Here are a few options.
Large initial payment. Say you've been unemployed for some time and your bills are mounting. You can design the structured settlement to provide a large initial payment so that you can pay overdue bills, pay off a mortgage, or purchase needed items like a new car. The smaller subsequent payments could then act as a substitute for lost income.
Additional amounts for extraordinary expenses. Some settlements are designed to provide a yearly income, with additional amounts allowed to pay extraordinary expenses like college tuition.
Payments increase over time. Structured settlements can also be designed to step up payments over the years—starting relatively low and ending higher.
Payments decrease over time. Structured settlements can also start high and decrease over time. This might be of benefit if you expect your income to increase over time.
Delayed payments. Some plaintiffs even choose to delay payment of their awards until they reach retirement.
To carry out these periodic payouts, the defendant will often purchase an annuity from an insurance company. That way, the defendant can remove your obligation from its books and transfer the responsibility for payment to a company with expertise in managing periodic payments.
Some experts argue that placing the annuity with an insurance company is a more stable alternative than relying on the financial health and stability of defendant corporations.
The choice between a lump-sum payment and a structured settlement can have long term tax and personal consequences. Here are some of the issues to consider. Be sure to discuss these with your attorney or financial adviser.
Whether your award is taxable or tax-free will depend on whether it is intended to compensate you for physical injuries or sickness or whether the damages are punitive (meaning they are intended to punish the defendant for its actions). (Learn more about damages in personal injury cases.)
The form of the payment—lump sum or periodic payments—can also affect your tax obligation. The law is complicated so check with a tax attorney or tax professional. (Learn about taxes and personal injury awards.)
Do you need the money right away to pay past due bills or replace an aging car? Do you expect to use the settlement to replace future income? Do you want to give it all away to charity? Your goals for the money will have a large impact on how best to structure the award.
Most personal injury plaintiffs lack the expertise to manage a large lump sum award on their own, and instead must hire a financial professional for advice on how to best manage and invest your asset. Unless you have a qualified friend or relative willing to advise you for free or at a reduced cost, you will likely have to use some of your new cash to pay for this advice. Some people choose a structured settlement to avoid the hassles of managing a large sum of money.
Having access to a large sum may be too enticing for some plaintiffs who do not have the skills to manage a large award. Instead of putting away the money to provide for their future personal and medical needs, some people will spend it on questionable investments or purchase expensive luxuries. If you think this might be you, then a structured settlement may be a good idea.
People who have received large lump sums in personal injury cases report that relatives, friends, and even strangers often ask for a loan, to pay their bills, or money to invest in their “next big idea.” Taking the award as a structured settlement can help you resist this sometimes intimidating pressure.
Your attorney will likely have helpful opinions and will negotiate the terms of the settlement on your behalf. Regardless of whether you choose a lump-sum payment or a structured settlement, it is worth your while to consult with a tax professional, accountant, or financial planner to determine how the structure of your award or settlement will help you to maximize your outcome based on your personal circumstances and to achieve your financial goals.
]]>However, the legislature changed the law in 2018 so lenders that make payday-type loans in Ohio must comply with the state's Short-Term Loan Law.
In 2008, Ohio enacted its Short-Term Loan Law (Ohio Rev. Code § 1321.35 and following). This law provides significant protections for borrowers.
However, because lenders could evade this law, no lenders obtained licensure under the Short-Term Loan Law from 2008 to 2018. Instead, they made loans under other laws that were less restrictive.
To get around the consumer protections the Short-Term Loan Law provided, payday lenders used to do the following:
Ohio’s Mortgage Lending Act (MLA) (Ohio Rev. Code § 1322.01 and following) places a cap on interest rates but doesn't have the other restrictions found in the Short-Term Loan Law. Payday lenders used to be able to register under the MLA and offer short-term loans with terms that would have violated the Short-Term Loan Law.
The only restriction on loans made by lenders registered under the MLA is that the interest rate is capped at 25%. (Ohio Rev. Code § 1322.30). Payday lenders got around the cap by creating Credit Service Organizations, a kind of payday loan broker.
Under Ohio law, a Credit Service Organization is an organization that, among other things, helps consumers find loans. (Ohio Rev. Code § 4712.01 and following). In the past, a borrower agreed in a standard payday lending contract to hire a Credit Service Organization to "find" the loan, and the payday lender "accepted" the borrower's payment to the Credit Service Organization.
So, when an Ohio resident got a payday loan, that person typically took out the loan from a lender that was actually registered as a mortgage lender. The interest rate on the loan wouldn't be more than 25%. However, a large fee was tacked on to the loan for payment to a Credit Service Organization.
Under the federal Truth In Lending Act, the Credit Service Organization fee must be treated as a finance charge. The promissory note described the fee as a “prepaid finance charge,” and it was added to the total interest the borrower paid on the loan. In the end, the interest rate stated on the promissory note was significantly higher than the 25% rate allowed under the MLA because of this additional fee.
The Ohio Supreme Court basically gave a seal of approval to the loophole in Ohio Neighborhood Fin., Inc. v. Scott, 139 Ohio St.3d 536, 2014-Ohio-2440. The Court held that payday lenders can also be mortgage lenders under the MLA.
Interestingly, one of the justices noted that after the passage of the Short-Term Loan Law, not a single payday lender registered as such under that law. The justice wrote:
How is this possible? How can the General Assembly set out to regulate a controversial industry and achieve absolutely nothing? Were the lobbyists smarter than the legislators? Did the legislators realize that the bill was smoke and mirrors and would accomplish nothing?
So, to address these issues, the Ohio legislature passed the Ohio Fairness in Lending Act in 2018.
Because of the Ohio Fairness in Lending Act, payday lenders in Ohio that offer loans of $1,000 or less or for a duration of one year or less can't operate under any law other than the Short-Term Loan Law.
Again, the Short-Term Loan Law, which payday lenders must now comply with, has significant protections for borrowers.
The Short-Term Loan Law prohibits lenders from giving you a short-term loan over the phone or by mail. (Ohio Rev. Code § 1321.36).
The law also prohibits a lender from making a short-term loan to a borrower if an outstanding loan exists between that borrower and any of the following:
But this prohibition doesn't apply if the loan is being refinanced. (Ohio Rev. Code § 1321.41).
The law gives the borrower the right to rescind or cancel the loan by returning the originally contracted loan amount by 5:00 p.m. of the third business day after the day the borrower enters into the loan contract. (Ohio Rev. Code § 1321.39).
After making a payday loan, the lender can contact the borrower only about specific topics, and the contact must be for the borrower's benefit. Generally, the allowed topics include upcoming payments, payment options, payment due dates, and the effect of default. (Ohio Rev. Code § 1321.41).
After default, the allowed topics include receiving payments or other actions permitted by the lender, advising the borrower of missed payments or dishonored checks, and assisting the transmittal of payments via a third-party mechanism. (Ohio Rev. Code § 1321.41).
Additional protections under the Short-Term Loan Law include:
Also, lenders are limited to charging a monthly maintenance fee of not more than 10% of the loan or $30, whichever is less (and the fee can't be added to the loan balance to which interest is charged). (Ohio Rev. Code § 1321.40).
In addition, the lender can't accept the title or registration of a vehicle, real property, physical assets, or other collateral as security for the loan. (Ohio Rev. Code § 1321.41).
The Short-Term Loan Law requires lenders who make payday loans to get a license from the state as a short-term lender. (Ohio Rev. Code § 1321.36).
Learn why you should avoid fast-cash options, such as payday loans.
Find out how you can stop automatic payments on a payday loan.
Get information about different options for getting out of debt.
If you need money fast, it's usually best to avoid payday loans. For information on how payday loans work and managing debt, get Solve Your Money Troubles: Strategies to Get Out of Debt and Stay That Way, by Amy Loftsgordon and Cara O'Neill (Nolo).
]]>When you win or settle a personal injury suit, you might have a choice to take your award as a one-time lump sum payment or as a structured settlement, which is a series of smaller payments over a period of years. Many people choose a structured settlement for its tax advantages, to avoid difficulties of managing large sums, or to ensure a stream of income when it's needed most.
Structured settlements are often designed to take into account your future income needs, ongoing medical bills, your income from other sources, and other upcoming financial obligations, like college tuition for your children. Structured settlements can't, however, account for all financial challenges. Although your settlement might pay you $10,000 each year for 30 years, at some time during the payout period, you might want to tap into those future payments to cover a present need.
To cash out your settlement annuity, you sell your right to receive certain payments that are due under your settlement agreement. The companies that buy the rights to these payments, and give you cash, are called "factoring companies."
The commercials make the process sound quick and easy, but in almost every state you must get approval from a judge to sell your future payments to a factoring company. The review is designed to ensure that the request and the terms of the cash-out are in your best interest. The process, therefore, can take a month or more.
When you go before the judge, you'll probably have to justify your request. Using the money to pay medical bills or buy a new car might be acceptable. On the other hand, the judge might think that taking a luxury vacation or investing in your brother-in-law’s get-rich-quick scheme is not a good enough reason to sell future payments for less than their value. Even if you need the cash-out to pay ordinary living expenses, a court could be reluctant to approve your request.
The amount you can cash out of your future settlement payments depends on many factors. These factors can include:
Financial experts will encourage you to shop around and talk with several companies to get the best deal, remembering that the best deal isn't necessarily the one that claims to be the fastest. Instead of relying on television ads, consult with your attorney or a financial planner for referrals to reputable companies. Your financial planner or attorney can also help you run the numbers to evaluate the consequences of selling your future payment stream.
Finally, consider looking for alternative sources for the cash you need before you commit to selling your settlement. If you have other assets, like a home with equity or a retirement account, it might be more cost-effective for you to borrow against those assets than to cash out a future guaranteed payment. Even personal loans or cash advances on your credit cards are likely to cost less if you're disciplined about paying them timely or using your future settlement installment to retire the debt.
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