Beware of Costly Loans Disguised as Holiday Checks

Don’t fall for this predatory loan

Barely a day goes by where my wife and I don’t receive some kind of credit card or loan solicitation in the mail. Ordinarily, we just tear these things up and throw them away.

Then a “Special Christmas Loan Offer” came in the mail last week. It contained what the financial industry calls a “live loan check,” which is one of the ultimate low and sneaky tactics in predatory lending.

Inside the envelope was a check from Republic Finance made out to my wife for $3,140. It had routing numbers, account numbers and all the appearances of an actual check.

I assume it was valid because on the back, above the endorsement line, was a paragraph that said by signing the check, “you agree to the terms of the attached note and arbitration agreement.”

There was also a warning in all capital letters that the “cashing of this check will enroll you in a program or a loan, or will cause you to be bound to repay the loan or purchase goods or services which may cost you additional money.”

On the perforated sheet below, it said, “Let us help you for Christmas!” There was a picture of a Christmas tree with a giant present.

It recommends using the cash for debt consolidation, home improvements, important purchases, vehicle repairs and … holiday shopping.

There were no forms to fill out, nothing to do. All I had to do was cash the check. I was holding $3,140 right there in the palm of my hand.

Of course, it’s a truly terrible idea to take such a shady pre-approved deal that comes in your mailbox.

How bad are these loans?

At least the terms were clearly spelled out. If I cashed that check, I was agreeing to repay the loan in 30 monthly payments of $150 each. I’d pay 29.97% interest, or $1,359.41, over the life of the loan, for total payments of $4,500.

The back of the page listed just about everything you need to know in fine print. There was a section on the details of the loan, including finance charges, right to prepay and late fees. Beneath that was a half page outlining the arbitration agreement about what happens should you default on the loan.

It leaves me wondering how such shady lending tactics are even legal. The problem is that, when people are on hard times and an offer like this appears in their mailbox, it may be too hard to resist.

When a person has little money in the bank, struggles to pay bills and is living paycheck to paycheck, it could be very tempting to cash that check.Loan companies use them as bait. They’re essentially fishing for consumers who don’t know any better. They mail out hundreds of thousands of these checks, knowing that only a small percentage of people are going to cash them.

With some loans, the minimum payments are structured so that up to 85% of the payment goes to paying interest. These can lock consumers in a never-ending cycle of debt.

In 2011, U.S. Sen. Jeff Merkley, an Oregon Democrat, introduced the Deceptive Loan Check Elimination Act, designed as an amendment to the Truth in Lending Act. It would have prohibited lenders from sending unsolicited checks to preapproved consumers. But the bill never got anywhere.

These “live checks” are banned in many states, including Michigan, Minnesota, New Jersey, Utah and Virginia. Other states, such as North Carolina and Virginia, allow these unsolicited checks but require specific disclosures and restrictions on their use.

Wherever you live, there’s really only one thing to do should you receive an unsolicited check like the one I got in the mail.

Tear it up.