Have you received a preapproved offer in the mail this holiday season that looks like a check, made out to you and ready to cash? Before you rush to the bank, visions of presents dancing in your head, know that it’s not free cash. Rather, it’s more likely an expensive loan.
Such pre-screened mail offers, or “live checks,” are personal loans sent from banks or lenders to consumers who meet certain criteria, like a minimum credit score. Cashing the check enters you into a loan agreement that may last multiple years and have an annual interest rate above 25 percent.
Chris Jackson received a live check in the mail last November for $2,500 with a 28 percent interest rate. Jackson, a financial planner, was skeptical, but his family reacted differently.
“I asked my family what they would do with (the check), and of course they said they would cash it,” says Jackson, founder of Lionshare Partners, a financial planning firm in Los Angeles.
“They told me that it would be nice to have extra cash for the holidays. But it’s not cash, and the rate was worse than a credit card,” says Jackson.
LIVE CHECKS: THE COSTS AND RISKS
Most lenders that offer live checks do not consider your job status, income or ability to repay a new debt. Often, the loans are unaffordable for borrowers who have other debts to pay, says Carolyn Carter, deputy director at the National Consumer Law Center, a nonprofit consumer advocate organization.
“Pushing credit on people when they haven’t actually asked for it can easily lead them to being overextended,” Carter says.
US senators Doug Jones (D-Ala.), Tom Cotton (R-Ark.), and Jeff Merkley (D-Ore.) introduced legislation to stop what they call the “predatory practice” of mailing live checks to consumers. The Unsolicited Loan Act of 2018, introduced Dec. 10, would ensure that consumers get loans only when they apply for them. The senators plan to push the bill forward in 2019.
Mariner Finance sends live checks with rates up to 36 percent. In 2017, Regional Finance mailed more than 6 million live checks and earned an average yield of 42 percent on small loans ($500 to $2,500), including live checks, according to its annual report.
The $2,500 loan Jackson received at 28 percent would have cost almost $800 in interest with a two-year term.
Live checks sometimes have optional add-ons that effectively increase the total cost:
— Credit insurance, also called payment protection insurance, is an option that covers the loan balance if you can’t repay due to death, involuntary unemployment or disability. It’s an unnecessary cost if the borrower already has life or disability insurance, Jackson says.
— Refinancing may be offered if you can’t repay the loan. You get more cash and a longer repayment term, but also additional interest and potentially an origination fee.
— Attorney fees may be charged if you default on the loan. Such fees, the cost of which varies by state, cover the lender’s expenses of pursuing legal action against you.
WHAT TO DO IF YOU GET A LIVE CHECK
If you’ve received a live check, take these steps, whether you plan to cash the check or not.
RESEARCH THE LENDER. Check if the lender is licensed to do business in your state through your state’s bank regulator. Visit the Consumer Financial Protection Bureau complaint database to see if the lender has complaints.
If you think the live check is a scam, you can report it to the Federal Trade Commission .
READ THE LOAN AGREEMENT. Understanding the loan’s rates and terms helps determine its affordability. The agreement should detail the total annual cost of borrowing, represented as an annual percentage rate and including interest costs and fees; the number of required payments; and payment amounts.
SHOP AROUND. Compare personal loan rates and terms at credit unions, banks and online lenders. If you have bad credit, you may be able to get lower rates at federal credit unions, which cap rates on loans at 18 percent. You can also check rates and terms at online lenders. Most run a soft pull on your credit, which has no impact on your credit score.
FOCUS ON LONG-TERM SOLUTIONS. Create a budget that tracks your spending, which can identify unnecessary spending and help you pay off debt or direct money to an emergency fund. You can then use cash for emergencies instead of high-interest credit.
RIP IT UP. Shred and toss the check in the trash if you don’t want the offer. It’s possible someone could steal your check, sign and cash it in your name. Several consumer complaints at the CFPB highlight the identity-theft risk of live checks.
If you never again want to receive a live check, you can opt out of unsolicited mail.