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Payday & Quick Cash Loans: Why They Are Bad for You

When you’re unemployed, these cash call overnight loans look like the only option. When money is tough the quick loans and cash advance commercials are incredibly attractive. Images of smiling men and women of all races and ages describe to you in upbeat voices how great it was that a $10,000 loan is only a phone call away.
Here’s what’s not mentioned:

• These loans are targeted specifically at individuals with lower-incomes.
• The APR on these loans easily surpasses the interest rates on credit cards. (However, because of a poor credit rating, these people who end up at getting an easy loan at cash advance stores are denied credit cards.)
• The APR ranges from 35% to 59% to 96%–if everything works out.
• There are hidden fees that aren’t made clear. So often, you are paying much more money than you expect.

Knowing how damaging these lenders are, my curiosity kicked in and I decided to call a company today to see how “good’ these deals really are. Read on to see what I found out.

If I borrowed $2,600 to be paid over three and a half years, here’s what it would look like:

• Monthly payments: $216.55
• Annual interest rate: 96%
• Loan Period: 3.5 years (40 months)
• Total Interest: $6,493.82
• Total Repayment: $9,095.10

If I borrowed $5,075 to repay over ten years, here are the details:

• Monthly payments: $250.31
• Annual interest rate: 59%
• Loan Period: 10 years (120 months)
• Total Interest: $24,932.19
• Total Repayment: $30,000

These repayment plans were sent to me from an agent who works for the specific company I called. I am stunned, speechless, astonished, and dumbfounded. People who aren’t financially educated are being preyed on by those who are too financially astute. I know it’s not criminal, but it’s ridiculously immoral.

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Other Budget Busters

Last week, I wrote about My Top 5 Budget Busters. This past week, I had been thinking about other budget busters that exist in other people’s budgets.

1. Cigarettes — I don’t smoke, but I often hear about people being a pack-a-day smokers. Assuming that a pack of cigarettes cost $5/pack. ($35.00/week; $140/month) Not computed is the future health care costs associated with smoking OR the increase in health/life insurance premiums smokers have to pay. These additional costs probably reach the tens of thousands over a lifetime.

2. Vending Machines — I have to admit, every time I do my laundry, I treat myself to a soda from the vending machine. I was talking about the vending machine at the laundromat and a friend of mine says he uses the vending machine at work twice a day, costing him $1.50. ($7.50/week; $30.00/month)

3. Credit Card Interest – Using Bankrate.com, I made up what a $10,000 credit card debt costs an individual. Over the course of a month, they spend about $150/month on interest only. ($150/month; $1704.21/year)

Each of these are unnecessary expenses and only end up killing your budget–and your savings–in the long run.

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Zombie Debts & Debt Collectors

This post originally ran in MollysBrother.com in 2006.

In the news recently, I’ve come across a lot of information regarding debt collection agencies and their practice of collecting money from years-old debt. For those in the know, this debt is often referred to as “zombie debt” since, quite accurately, it seems to have come back from the dead.

A friend of mine who knows that I blog about personal finance recently received a call from a collection agency regarding a debt from over a decade ago (and on top of that, he knows for a fact that this bill was paid). He took down the information and gave me a call. I told him that [tag]debt collectors[/tag] cheaply buy old debts from companies. And, as per usual, they’re agressive and unceasing in his actions in trying to make you pay for old debt. Read the rest of this entry »

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My Top 5 Budget Busters

I have been tracking my spending again recently and I was surprised to see what my Top 5 Budget Busters were. Over the past two years, I had done a great job cutting back my daily expenses, but then I switched jobs and all the conveniences I was used to at my previous job disappeared (i.e. no break room with a coffee maker or refrigerator). A look at my recent spending shows what my budget busters are. I am estimating the amounts that I spend–and the amounts that I will save–over the course of the year.

1. Coffee – I do enjoy my coffee. I fill two travel cups of home-brewed coffee before I leave the house in the morning and I finish both of them on my drive to work. When I get to work, I buy one more coffee. It costs $2.67. I make this purchase five times a week. ($13.35/week; $53.40/month)

2. Lunches — I do enjoy my lunches, too! I don’t wake up early enough to pack a lunch. If I did, it would cost me about $1.07/day. The lunch I buy at work costs me $5.69. ($28.45/week - $5.35 = $23.10/week; $92.40/month)

3.  Unused Memberships –I talk about this often, but sometimes I don’t heed my own advice. I looked at my monthly credit card and noticed a recurring monthly membership for $19.99. I decided to cancel this promptly. ($19.99/month)

4. Weekend Entertainment – I looked back on the nights spent out with friends. In Los Angeles, non-happy hour adult beverages clock in at $14.00/drink. If I buy 2 a night and go out 2 nights a week. (With tips, $60.00/weekly; $240/month.)

5.  Water — I buy the box of 1L waters that Trader Joe’s sells. Unfortunately, since we don’t have a water cooler at work, I can’t cut this out of my budget. But I noticed that this is a persistent budget buster. Thank God, though, that TJ’s sells their water cheap. (I won’t calculate this because I am not cutting this out of my budget.)

All told, I can save this much in a week:  $101.80

All told, I can save this much in a month: $405.79

By cutting out these budget busters, I can save this much in a year: $4,869.48 

Sigh. We’ll see how much of that I can save in a year. Baby-step by baby-step, it will be interesting to see how much of these budget busters I can cut out of my life and save in a year.

Posted in Saving, Your Budget | 1 Comment »

Debt Elimination: Important Key Concepts

If you are wondering how to eliminate debt, then this blog is a great place to start. There are many, many creative ways to go about eliminating your debt. But there are some important and key concepts that lie beneath each of the strategies for debt reduction. It doesn’t matter if you are following David Bach’s plan or Dave Ramsey’s plan. What does matter are these following concepts.

1. You need to spend less than you make. While an easy concept for some to grasp, this might be impossible for others. Debt is created by the simple action of spending more than you earn. You can only get out of debt if you bring your spending habits under control.

2. Stop using the credit cards. You will never be able to get out from under your mountain of credit card debt if you continue to use your cards. It is already bad enough that the balance you are carrying is being charged an insane interest rate each day! Even if you do stop spending, your debt still grows! In order to stem the hemorrhaging, you need to stop feeding the debt. Leave the plastic at home.

3. Find ways to make extra money. An incredibly helpful concept: make more money and use this “new” money to reduce (and eliminate) your debt. Many of us aren’t able to benefit from astronomical wage increases at a current jobs. Therefore, we need to find part-time jobs that will help increase our income so we can decrease our debts.

4. Stay focused. I say this time and time again: You did not get into debt overnight. You can not get out of debt overnight. Debt elimination takes focus and perseverance. It will put an emotional strain on your relationships, it will be hard work, but it will be worth it. Imagine being able to sleep through the night without worrying about debt!

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Overcome Your Inertia: Set up your IRA

I think I have created a central theme to 2008: It’s year when I will overcome my inertia. I think we are all beholden to a level of inaction to varying degrees and in different circumstances. For example, there are some of us out there who, for whatever reason, have still not acted in establishing and funding an IRA. They know they should. They want to. But the idea of how to do it seems like just too much. The time to overcome the inertia is NOW! You can’t afford to wait any longer.

1. Find a company that suits your needs. A few months back, ING purchased Sharebuilder.com The company has been re-branded and fits well with its parent company. There are low-trade and low-commission fees. You can open a no-minimum account at Sharebuilder, as well. But other financial institutions have great offers, as well. Bank of America. eTrade. Merril Lynch. Etc, etc, etc. You do your research. You decide.

2. Figure out which IRA works best for you. Often times, when opening an account, you will be presented with easy-to-follow comparisons of which IRAs work best for you. It may be a traditional IRA. It may be a Roth-IRA. It may be another type. Try to suppress your feelings of being overwhelmed and make a decision. Overcome that intertia.

3. Figure out where you want your money invested. This is an important step. Often times, people open retirement accounts and don’t follow-through and decide where they want their money invested. The default option is often  very low risk and very low return. So, as soon as your money is put into these accounts, study the different investment options and figure out where you want your money to go (and grow).

4. Remember, you’re in for the long haul. IRAs are not short-term investment accounts by any stretch of the imagination. Your balance will go up. Your balance will go down. I remember a couple of months back, checking my account on one of the worst days the market had in months. Big mistake. And one that I won’t make again!

5. Add to your account monthly. Make it a habit to add to your IRA. By not adding to your retirement, you are robbing yourself in the future.

It is important to overcome the inertia in order to make sure that you are accurately planning for your future financial needs.

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My Favorite: Dave Ramsey’s ‘Debt Snowball’

I know that there are dissenters out there. And I know that there are critics of his, too. (I am one, too. Dave gets a little to religious and preachy for me at times, so I can see how we can turn some non-Christians off.) But the reality is that, out of all of the debt elimination strategies, Dave Ramsey’s “Debt Snowball” is my favorite and, I think, the most effective.

What is the Debt Snowball?

For those of your new to the personal finance blogosphere, the Debt Snowball is a debt elimination technique that was created by Dave Ramsey. (In addition to having authored books and hosting a daily radio show, Dave has a TV show on the Fox business channel. Or at least, he did. I don’t get the channel, so I don’t know.) If you are not familiar with Dave, run and buy his book. (Or click over to buy his book.)

How does it work?

The debt snowball suggests that you list out all of your debts. Then, while paying the minimum payments on all your outstanding bills, you attack the smallest debts first. In addition to that minimum payment, you throw all your extra money at that debt. So, instead of (let’s say) paying $200/month on a credit card debt. You find a way to make an extra $100 or $200 a month. You now put that extra money towards that credit card. So, now you are paying $400/month towards the debt. Once you’ve paid off that debt, you then take THAT $400 and add it to the minimum payments of the next one. So now, you are putting $400 + minimum payment towards that debt. Once you pay that off, you then take that new amount and pay off the next debt. Ideally, once you get to the larger debt amounts, you should conceivably be able to pay them off in a fraction of the time.

One Important Note

It is important to note that Dave has developed an entire system to debt reduction and financial freedom. This is merely one small–but important–aspect of it. In order for this to work successfully, I believe that all other aspects of his plan must be followed as well. If you are unfamiliar with Dave or are interested in re-committing to his Total Money Makeover, head on over to Amazon and get his book.

Posted in Debt | 2 Comments »