8/20/2012 2:15 PM ET|
5 businesses that rip off the poor
3. Used-car leasing
Here's an even more lucrative (for dealers) twist on the buy here, pay here model: lease here, pay here.
Instead of selling clunkers, lots lease them to drivers with poor credit who desperately need cars to get to work. The drivers often pay $1,500 to $2,000 upfront and then hundreds of dollars a month for a high-mileage car.
Dealers retain the cars' titles, so they don't have to go through formal repossession procedures. If you stop paying, they simply come take the car or disable it with a remote ignition lock. The terms of the lease can't be altered if the driver files for bankruptcy -- unlike auto loans, which a judge can restructure. And the deals typically aren't subject to state usury laws that limit interest rates.
The Los Angeles Times highlighted a lawsuit by Kai Harris of Clarkston, Mich., who is suing a dealership in federal court, saying her lease of a 2008 Jeep Patriot amounted to an interest rate of 38.5%, far above the state's auto loan limit of 25%. Harris paid $2,000 upfront and agreed to pay $124 a week for three years for the car, a total of $21,344 for a car with an initial value of less than $12,000. The lawsuit calls it "a usurious credit sale disguised as a lease."
As bad a deal as buy here, pay here can be, you would have more consumer protections financing a vehicle that way than leasing it.
4. Rent to own
About 6 million Americans pay dearly for their impatience. These people are customers of the $7 billion rent-to-own industry, which specializes in getting people to pay two to four times the retail cost for furniture, computers, appliances, electronics and even tire rims.
Many people never finish paying these inflated prices, which means they get a visit from the repo men taking the stuff back. And the truly horrible thing about rent to own is that people have plenty of alternatives to participating in this racket.
When I wrote about rent-to-own stores a few years ago, I found a Rent-a-Center in North Hollywood, Calif., offering a Klaussner couch, love seat and coffee table for $44.99 a week for 83 weeks, which worked out to about $2,000 more than the $1,657 the set would cost if you paid cash.
On Craigslist, I found a Klaussner couch selling for $200. If you put aside the $45 a week, you would have enough to buy it in less than five weeks. In all, there were 1,453 listings selling couches, 2,269 listings for sofas and 542 listings for love seats. Plenty were gently used and selling for $100 or less, sometimes a lot less.
At another Rent-a-Center, in Van Nuys, Calif., a used bunk-bed set was on offer for $22.96 a week for 65 weeks, or nearly $1,500, compared with a cash price of $663. Of course, Craigslist was littered with ads for used bunk beds for a fraction of that, and Ikea had a brand-new bunk bed set for just $149, with mattresses starting at $69. Anyone who needed bunk beds could save up by putting aside the same $23 a week the Rent-a-Center wanted and buying a set outright in about three months.
You don't have to be that savvy or thrifty a shopper to get a better deal than rent to own.
A 2008 Federal Deposit Insurance Corp. study found that people earning less than $30,000 were far more likely to incur overdraft fees than those with higher incomes. More than 38% of low-income accounts had at least one insufficient-funds transaction, compared with 22% of upper-income accounts. Among the low-income customers, 16.7% of accounts had one to four overdraft transactions, and 7.5% had 20 or more NSF transactions. That compared with 10.5% of upper-income accounts with one to four overdraft transactions accounts and 3.8% with 20 or more.
At the time, most banks were automatically enrolling customers in so-called bounce-protection plans that allowed overdrafts and then levied a $30 to $35 fee for each over-limit transaction. Concern about the programs' effect on low-income people and seniors on fixed incomes helped lead Congress to abolish the programs and require banks to get consumers' consent. Most people have opted out.
Now banks are finding other ways to ding those who have trouble maintaining big balances in their accounts. The primary method: monthly "maintenance" or account fees. Bankrate.com's 2011 Checking Survey found only 45% of noninterest accounts are free, compared with 65% in 2010 and 76% in 2009. The monthly fees often range from $8 to $15.
Burned by fees, many lower-income families have given up on banks. Nearly 20% of households with incomes under $30,000 don't maintain bank accounts, according to the FDIC.
You may be able to avoid the fees by setting up direct deposit of your paycheck. Or you may need to look for a new financial institution. Credit unions, community banks and online banks may offer no-minimum accounts or lower fees.
Liz Weston is the Web's most-read personal-finance writer. She is the author of several books, most recently "The 10 Commandments of Money: Survive and Thrive in the New Economy" (find it on Bing). Weston's award-winning columns appear every Monday and Thursday, exclusively on MSN Money. Join the conversation and send in your financial questions on Liz Weston's Facebook fan page.
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