In fact, hard-to-understand service agreements that confuse consumers about fees and charges cost American credit card holders more than $14 billion in 2012, according to BillGuard, makers of an app that helps consumers track credit card use. 'The reality is that very few of us have the time to read, track and understand most of these deceptive sales and billing practices,' BillGuard's 2013 Industry Report on Grey Charges says.
'The complexity of some financial disclosure statements can contribute to poor decision-making by consumers,' says Patrick O'Shaughnessy, CEO of Advance America, one the largest short-term credit providers in the country. 'We hope that the movement toward simplified disclosures will help consumers better understand their credit options, and the ramifications of all their financial choices.'
With the creation of the Consumer Financial Protection Bureau, more financial institutions - including banks, credit card issuers and other lenders - are piloting or introducing simplified disclosure statements designed to be much easier to understand.
Traditionally, short-term credit services have been easier to comprehend than more complex long-term borrowing vehicles like credit cards or mortgages. Advance America in particular has long worked to ensure its terms and fees are easy for customers to understand, and recently introduced an enhanced Simplified Disclosure to provide even greater clarity.
The disclosure lays out in a single page the obligations customers enter into when they take out a loan, gives them alternative products to consider and provides contact information for industry regulators. The idea is that if the disclosure and related agreement are shorter and in plain language, borrowers will be more likely to read them thoroughly and understand the terms of their credit. And at only a single page, this disclosure is substantially shorter than the average length of a bank checking account disclosure - which is 69 pages long, according to a 2012 report by Pew Charitable Trusts on the safety and transparency of checking accounts.
Advance America's new disclosure shows examples, in simple terms, of what borrowers will pay (typically a one-time, fixed fee of $15 per every $100 borrowed), when the loan repayment is due (usually in 14 days or 30 days) and how the borrower must repay it (in person with cash or check, or through the post-dated check written following the signing of the loan agreement).
'Transparency is one reason consumers choose short-term loans,' notes O'Shaughnessy. 'Many comparable products come with hidden fees and confusing disclosures or no credit disclosures at all.'
Typical cash advances are for $300 to $400, and consumers weigh the one-time, fixed fee against costs associated with other types of lending such as credit cards, overdraft programs, car title loans, pawn shops or cash advance products from banks and credit unions. When compared to the costs of bouncing checks or penalties for late bill payments, a one-time fee with no compounding interest and easy-to-understand-terms is a rational option for consumers.
Be certain, however, that when you seek a short-term loan you are dealing with a reputable lender. Licensed lenders such as Advance America are highly regulated at both the state and federal level, but unregulated online lenders offer quick money along with complex loan agreements and hidden costs. They can end up being more expensive than regulated short-term loans and don't provide consumer protections offered by regulated lenders because they operate outside the jurisdiction of regulators.
'Consumers should make every effort to establish and stick with a workable budget, but we all encounter financially challenging periods in our lives that might require a short-term loan,' O'Shaughnessy says. 'While not right for everyone or every expense, when you need such a loan, it's important to understand the terms of what you're agreeing to.'
To learn more about short-term credit, visit www.AdvanceAmerica.net. To learn more about how the Consumer Financial Protection Bureau regulates the financial industry on behalf of consumers, visit www.consumerfinance.gov.