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I Need to Finance a Car. Should I Pay Via an Allotment?

eee A couple of generations ago, we didn’t have the convenience of nearly unlimited and free online bill paying. It was common in those days for retailers and car dealerships located near military bases to allow servicemembers to make their payments via an allotment. That is, the military member would authorize DFAS to send a portion of his or her pay directly to the creditor.

This was nice when military members were off on TDY orders or were constantly moving, or just didn’t trust themselves to write a check on time to the dealer each month to avoid having their car repossessed.

Those days are long gone. It’s now extremely easy for any consumer with a checking account to authorize a lender to draw money electronically via an ACH transfer, or by using free on-line bill pay services provided by almost any bank in operation today.

So if you are considering paying by allotment, there are some things you should know about, says Holly Petraeus, the current head of the Office of Servicemember Affairs at the Consumer Finance Protection Bureau (CFPB).

  • Allotments may cost more. While ACH payments are almost always free, a third-party processor often charges a fee to set up allotment payments.
  • Allotments are harder to stop. Sure, you hope to make your payments on time. But emergencies happen, and you may legitimately need to readjust your budget. By using electronic bill pay or ACH, you receive your money first, before the creditor gets their cut. With an allotment, DFAS takes the creditor’s money out of your account first, before you eve see it. You don’t get the opportunity to pay your rent bill before you make your loan payment.
  • Increased Liability. If a bank sends money via ACH or automatic bill pay that you didn’t authorize, it’s the bank, not you, that’s on the hook, provided you notify the bank within 60 days. With DFAS allotments, though, the onus is on you.

Petraeus’s message of caution, first published on her blog at the CFPB, came shortly after the Bureau slapped a $6.5 million dollar penalty on U.S. Bank and a partner auto finance company, Dealers’ Financial Services (DFS) for a series of lending abuses targeting military members under a program called Military Installment Loans and Educational Services (MILES). The MILES program was aimed specifically at subprime military borrowers with little financial knowledge or sophistication.

Specifically, the two financial institutions committed the following improper or illegal acts, according to the CPFB:

Failing to disclose fees. U.S. Bank charged servicemembers a fee for processing allotment transactions without properly informing the servicemember. This fee added an average of $180 to the cost of the loan over a typical 60-month repayment period.

Failing to timely credit payments. Under the allotment system, the U.S. Bank received payment twice per month. But they only credited servicemembers’ payments once per month. Effectively, half of every payment the servicemember made was not credited for two weeks – causing the servicemember to pay extra interest, even though they had already paid, and event though the lender was already in constructive receipt of the payment. This slight of hand cost borrowers an additional $75, on average, over the life of the loan, according to the Consumer Financial Protection Bureau.

Understating the cost of add-on products. Dealer Financial Services’ marketing materials claimed that a vehicle service contract, offered as an add-on product to the sub-prime car loans, would cost just “a few dollars per month.” In reality, these service agreements average $43 per month.

Understating Gap Insurance Premiums. Again, Dealer Financial Services’ marketing materials falsely clamed that the add-on “Gap” insurance policy – which protected the borrower against having to repay the entire loan if the car was destroyed or stolen, would cost only a few cents per day. In reality, the premium on this coverage was over 40 cents per day – many times the amount mentioned in the literature.

As part of the settlement with the Consumer Financial Protection Bureau, servicemembers who were wrongly taken advantage of by U.S. Bank and Dealer Financial Services and their deceptive marketing practices will be reimbursed, either by receiving a check in the mail or by having their accounts credited, if there are balances still outstanding.

For further details, readers can see the two consent orders governing the settlement and the reimbursement of servicemembers who were wrongly charged here and here.

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