You may have seen “Courtesy Loans” advertised on TV or business billboards. They might seem like an easy way out of a money problem. But what are these loans, and what do you need to know about them?
Let’s take a closer look.
What are Courtesy Loans?
The term “courtesy loan” can mean one of three things.
- A loan requiring minimal documentation. Payday loans and title loans are often grouped in the “courtesy loans” category. These loans require very little documentation, which is presented as a courtesy to the customer.
- The name of the loan company. Several financing companies operate under the name “Courtesy Loans.” Some are payday lenders. Others may not be. Always look into a lender’s reputation and read loan agreements carefully!
- A loan of an item to temporarily replace an item being repaired. A company manufacturing an item may offer the “courtesy loan” of a replacement if you have to bring an item in for repair, especially if the item is under warranty.
In this article, we’ll focus on the first meaning. In some cases, that overlaps with the second meaning: some companies called “Courtesy Loans” offer courtesy loans!
There are two main types of courtesy loans.
- Payday loans are short-term loans, usually intended to be paid back on the borrower’s next payday. They are usually in relatively small amounts, often in the $300 – $500 range.
- Title loans use the title to an asset as collateral for a loan. Most title loans use car titles. Many lenders will lend up to 25% of the car’s value and will keep the car’s title until the loan is paid. In most cases, you will have to own the car outright.
These loans do not require a credit check and are often available with minimal documentation. You may only need to present a pay stub to confirm that you have a job.
Because of these minimal requirements, they are often used by people with bad credit, and many of the people who use these loans are already in a difficult financial situation.
How do Courtesy Loans Work?
Courtesy loans are easy to get, and the borrowing process is relatively simple. Here’s what you’d do.
Let’s say you’re strapped for money and your credit isn’t good enough to get a conventional loan. A payday lender agrees to lend you $500 for two weeks.
You’ll usually pay $15 for every $100 you borrow, so your fee is $75. You will probably have to give the lender a post-dated check for $575 or authorize a debit from your account. At the end of the 2 weeks, the lender will deposit the check or debit your account.
A title lender might agree to lend you $2000 for 30 days. The finance fee will be 25% of the loan, or $500. You turn over the title to your vehicle, and the lender gives you the cash.
You won’t have to turn over a post-dated check or authorize a debit because the lender has the title to your car. Some lenders may require you to install a GPS tracker or a remote starter interrupt on your car to make repossession easier if you don’t pay.
In 30 days, you will have to pay $2500 and any other fees the lender charges.
Are Courtesy Loans Really a Favor?
Courtesy loans are easy to get, and lenders present that convenience as a “courtesy” to the customer.
This courtesy comes at a steep price. An FTC review of payday and title loans points out that the APR (Annual Percentage Rate) of a payday loan is typically 391%. A typical title loan carries an APR of around 300%.
Lenders making these “courtesy loans” often quote a fee for the use of their money rather than an interest rate. A typical payday lender might charge $15 for every $100 you borrow. Title loan fees are usually a percentage of the amount you borrow, often 25%.
These fees may sound reasonable, but the terms of these loans are usually very short, often just a few weeks. It’s only when you see the cost as an annual interest rate that you realize how expensive these loans really are.
⚠️ If a lender claims to be offering anything as a “courtesy”, be sure you know what that courtesy is going to cost.
The Courtesy Loan Trap
Annual interest rates of 300% and above are pretty shocking, but the trouble doesn’t end there. There are many things that can go wrong and pull you into a cycle of high-interest borrowing.
- Rollovers. The Consumer Financial Protection Bureau (CFPB) found that 80% of payday loans are “rolled over” or renewed within 14 days. This happens when the borrower can’t pay, and the lender extends the loan for an additional fee.
- Late fees. If you can’t pay and have to roll over the loan, you may pay an additional fee.
- Escalating expenses. The same CFPB study found that 60% of payday loans are made to borrowers whose fees exceed their originally borrowed amount.
- Bank fees. If the lender deposits a check or makes an authorized debit and you don’t have enough in your account to cover the payment, your bank may refuse the transaction and impose a fee.
- Repossession. If you fail to pay a title loan, the lender can seize and sell your vehicle.
- Aggressive collection practices. If you fail to pay a courtesy loan on time, the lender will use all legal means – and sometimes illegal ones – to collect.
- Deceptive marketing. Lenders may recommend rolling over a portion of your loan or take out a new one. If you pay a loan on time, you can expect constant offers of easy money for whatever you want to do.
All of these factors make courtesy loans something that you should avoid if possible.
Are Courtesy Loans Legal?
Several states have regulated or completely banned these loans.
- Payday loans are completely illegal in Arizona, Arkansas, Connecticut, Georgia, Maryland, Massachusetts, New Jersey, New Mexico, New York, Pennsylvania, North Carolina, Vermont, West Virginia and Washington DC. Other states may allow payday loans with certain restrictions. Check your state’s laws and know your rights before borrowing.
- Title loans are illegal in most states. They are legal in Arizona, Arkansas, Connecticut, Georgia, Maryland, Massachusetts, New Jersey, New Mexico, New York, Pennsylvania, North Carolina, Vermont, and West Virginia. Title loans are legal above fixed minimum amounts in California, South Carolina, Kansas, and Louisiana.
⚠️ Lenders making courtesy loans are frequent targets of enforcement actions by the Federal Trade Commission and other regulatory actions, often for deceptive or exploitative lending practices. An internet search can tell you if your lender has faced or is facing enforcement actions.
Alternatives to Courtesy Loans
Courtesy loans sound like an easy way to get money, but for many borrowers, they’re a step into a trap with very few exits. Consider these alternatives.
- Try a personal loan. Not all courtesy loan borrowers have bad credit. A courtesy loan may just seem like the fastest and easiest way to get money. If you qualify for a personal loan it will be a much cheaper alternative.
- Talk to your bank or credit union. Many banks and credit unions have loan products designed specifically as payday loan alternatives.
- Talk to your employer. Many employers are aware of the courtesy loan trap and may be willing to help you avoid it.
- Borrow from family or friends. It can be embarrassing, but it’s better than the courtesy loan trap. Be sure to have a written agreement and only borrow what you can afford to pay back.
- Ask creditors for more time. Many courtesy loan borrowers use their loans to pay off another debt. Asking the original lender for more time or better terms may be a better solution than a courtesy loan.
- Use your tax return. If you have a tax return coming, filing early might be a way to cover your shortfall.
- Look for help. Local charities and churches may have programs designed to help financially stressed people.
- Get your finances in order. Emergencies can always happen, but if you’re having persistent financial problems credit counseling might help. Many counselors offer a free initial consultation. Consider other debt relief options as well.
Courtesy loans can save you the embarrassment of talking to friends, family, employers, or creditors about your financial problems. That doesn’t make them a good idea. In almost every case, you’re better off confronting your financial issues and looking for longer-term solutions.
⚠️ Avoid courtesy loans if you can.