What to Avoid and Where to Turn
Now it's, unfortunately, yes the banks do have a lot of tricks and traps in order to get you because dept is a very lucrative business for them. It's really what keeps the lights on for the banks. There's also a lot of predatory lending that happens for people and unfortunately a lot of times it can happen because you are just annexed out from all of the other options. You don't have the opportunity to apply for a personal loan maybe you don't even have a credit card in the first place and you need money and this is a short term problem. But I really want you to avoid the options that I'm about to talk about. And those being payday loans and title loans. And I want to go over how they work to make sure everybody understands. So a payday loan is really meant to be a short term loan. Its name coming from the idea that it's usually about two weeks and you pay it back on payday. Sometimes it's a 30 day loan but generally about 14 to 30 days is suppose to cover you in just a small financial...
bind. Thing is, it comes with incredibly high fees. These fees, if you annualized them out are generally about 300 to 400 percent APR. Noticing a credit card at 25 percent is high APR. This is 300 to 400 percent. Now, also because they're not meant to be taken out for a full year. But a lot of times people end up in a cycle with them that means they are paying them off for years. So here's how it breaks down. Let's say you're in a jam and you need 400 dollars to makes rent this week. So you go get a payday loan to cover the short fall. You don't have any emergency savings. You don't have any other opportunity for someone to help you out. Credit Card isn't an option for you and a traditional bank is not going to approve you for a personal loan. So you go to a payday lender. They're gonna say, yep, no problem. For every 100 dollars you borrow from us we charge you a 15 dollar fee. So in, you know 14 days you owe back the initial 400 dollars as well as 60 dollars in fees. So you owe us back 460 bucks. You take it out thinking it's not going to be a problem but something else happens, another bill pops up that demands your attention. Now, you're not able to pay off that full 460 dollars that you owe to your payday lender. You're gonna actually be short, you can only cover 250 dollars of that amount. Your lender's gonna say, not a problem. You can just roll this amount over that you need, your gonna take out a new loan from me to pay off the existing loan but you also need to pay off the new loan as well. Which is where this cycle starts. So you can take out a new loan to cover that 210 dollars that you still owe. And that new loan comes with another 30 dollar fee, so you're going to owe that 210 dollars back plus 30 dollars and this is how the cycle starts. It can get really hard to get yourself out of a payday loan dept cycle. And as I just mentioned, interest rates on these really are crippling. They are not meant to be annualized out they're suppose to be short term. That's really the language that they use. Well we're not suppose to be a long term solution for you so we can charge you for these fees is what they'll say. 300 to 400 percent is very common in this industry. This also is outlawed in a lot of different states. A lot of sates you're not even suppose to be aloud to get access to payday loans but they found a lot of loop holes especially cause of the internet with being able to fund you loans from different states other than the one you're in. Completely depends on where you live. But again, high interest rates on a credit card is 25 to 30 percent and now we're talking about the hundreds. Now another option is something known as a Title loan, it's pretty much the exact same thing as a payday loan except this time you hand over the title to something you own like a motorcycle or a car and that's the collateral on the loan. So if you can't pay it off they're going to come repossess whatever you gave them the title for. So not only are you in a financial situation you could now lose your mode of transportation. Which means you can't get to work. So this is why these particular types of loans are incredibly predatory and I want you to always do everything you can never to turn to these as solutions to a problem. They also create even more fees sometimes because, what can happen is you can give your payday lender access to your bank account in order to make a monthly debited payment on the account. And then what can happen is you can have a low balance on your checking account they go in and take out the money they need and now you're being charged an overdraft fee of probably about 35 dollars in addition to the money that you owe on the payday loan because you didn't pay it off and it bounced. This is very common that it does create more fees for people the other thing sometimes is people try to negotiate getting out of them but still give access to their bank accounts and the payday loaners are like well we're coming for our full amount and we'll overdraw your account. So, I would recommend trying to never give direct access to your bank account for a payday loan or anytime you're trying to pay off a collections either. Do not give them direct access to your bank account. So what are the options if you're still in a bind? One, not an option for everyone of course, but, if you can turn to a loved one, someone in your community that can loan you the money. This could be a way that you can instead of turning to something predatory borrow from someone in your life. Now one thing I do recommend doing is coming up with some sort of contract. Formal or informal, I don't really care but making sure that you write down the terms of this agreement with someone that you love in your life. Because it takes a little bit of the stress off. Have some sort of payment plan with that person that you are going to pay them certain amounts over a period of time. So that their not nagging you about when the moneys coming back and you're not feeling stressed about the fact you owe them. It's one way to take the stress off. Now if this is reverse, if you're the lender to a loved one I encourage you to think of this as a gift not a loan. Because we all know people who and maybe you personally have gone through the experience of loaning someone money and never getting that money back and getting resentful of the situation So, if this is you and you get approached to lend money to a loved one and you're going to do it, I do encourage you to reframe it in your brain as a gift. But if you're the borrower, try to pay it back. Another option is looking for any form of charitable assistance either in your community or online We've all seen there are options online for thing like, Go Fund Me, there are also organizations like Modest Needs which is specially for people who need smaller amounts of money something like, maybe having to fix a tire on your car, either a smaller medical bill, something you may normally turn to a payday lender. This is a website where people can come on and help fund your situation typically on slightly smaller amounts but that can make a huge difference in your life. And you can also look at local organizations or church groups in your general community. Or national organizations like the Salvation Army, Catholic Charities or United Ways. So, just making sure that you are aware that there are a lot of actual different opportunities out there for you that if you have a short term problem. Instead of turning to something predatory make sure you exhaust all of your other options first. And they do exist. Ultimately too, when it comes to paying back consumer dept especially something like credit cards you do have to take ownership of the situation. I know I started this saying that I don't want you to feel shame and I don't. I don't want you to feel awful about the situation that you're in. But I do want you to take ownership over what happened and I want you to make an attack plan and face those numbers and also really evaluate the why. How did you get into that dept in the first place and what can you do to ensure that this is never going to happen to you again. And then if it does, evaluate how you got here again and kind of using that as a way to-- going back to our very first segment, the phycology of money. What is this cycle that you're putting yourself in and how can we be breaking out of it. Any questions?
We do have a question, a couple online. So the first one is from, Kat. Who says we get so much mail from a lot of financial companies and there's always opt out option at the bottom. Whether that's, I don't know if she means physical mail or emails, perhaps. She says she's afraid to opt out for fear of missing a good deal but also worried she'll get tempted by a gotcha offer. What do you recommend with the prequalification offers?
I'm thinking we're mostly talking about physical mailers but you could still be getting emails. I still get stuff when I log in online to my credit cards. They will still pop up offers for you rather it's relevant or not. I would recommend unsubscribing to a lot of them just because it's junk mail. In terms of worrying about missing out on an offer you can do all of this research online. I will also say go to sites like reddit, people share this information all the time. Especially when they're getting mailers. A lot of them will do blasts like, hey so and so bank is offering this for balance transfers or they're offering this in order to get 400 dollars bonus if you open a checking account with this amount of money for a period of time. So that is an interesting resource. Also those comparison websites I mentioned earlier like Magnify Money, Bank Rate and Nerd Wallet they are always staying on top of this information. So, if there's a new offer out there they know about it and they're also going to be putting it on their website. So, I would really turn more to the internet for comparison opportunities as well as just general forums where anybody is talking about money. Different bloggers will be talking about that as well. I think getting all this information in the mail can be really overwhelming. And, you might not actually be having the best deal for you. You might just think that sounds like a good deal but you're not comparing it to the other offers that are out there. So, I always want you to be comparison shopping.
Question in the studio?
And if people are just watching this segment, I am Erin's sister, so, I can speak a little differently to her. But it sounds like what you're saying with take ownership too is maybe if you know about yourself that you like a deal and you get yourself into trouble when you sign up for deals maybe I'm not the type of person who should be taking the flyer and being like, yay, 500 dollars if I spend three grand in three months, when I don't have three grand to spend. So, knowing yourself about the flyers, would that maybe be a better--
It's that but it's also going back to when you're talking about going for a sign on bonus for a credit card, if this whole segment has spoken to you because you're in credit card dept you have not earned the right to be travel hacking. You need to have been out of credit card dept for I think at least two years and the only reason you were in it in the first place is something related to an unforeseen circumstance not compulsive shopping or spending. That is really tempting fate and I don't think that ever makes sense to do. We will also be talking about that more and picking better financial products. But for people who have credit card dept for some reason or another that could be linked to something like medical dept. I understand the feeling of if I opt out of these flyers I'm not gonna know what my options are for a balance transfer and maybe they effectively used balance transfers before. Another thing you can do with a balance transfer is if you don't pay it all off on card one and let's say you've got a grand left to go, you can roll it over and find another balance transfer option and put it on another card at a different bank. Some people do get into the system of rolling it down. Especially if it's a high number like, 10, 000 dollars of credit card dept because you were financing a medical emergency that way. The odds of you paying that all down in 18 months on 0% are probably pretty slim so you then want to be rolling that balance transfer to another offer and I think that's what she's referring to as well.
Alright, one more question before we move on. This is from, Moreen. It's little specific but could apply to other people as well She's saying that she could pay off her credit card dept from her IRA, she's actually old enough where it wouldn't actually penalize her. Otherwise she said she's just paying 40 dollars a month to maintain the dept. So, is that a viable option or do you really have to crunch the numbers. She said he income is sporadic.
You do have to crunch the numbers I always caution robbing your future self to pay off dept but I also don't like using that word, maintaining the dept. If it's 40 dollars a month and there are some months where your income is larger and you can put more money towards the dept, do it. And pulling money out of your IRA if that's money that you really are setting aside for retirement you're not in retirement years yet but I'm thinking you're above 59 and a half so you could pull it out without having that 10 percent penalty. Be very careful about that because if you don't feel you can refund it and by refund it I mean put money back into your IRA, you could really be doing retirement you into service. But, again, it's hard for me to say don't know the specifics of the credit card dept, how bad it is, what your options are. Maybe a balance transfer is a good option for you depending on why you had the dept in the first place to get it to zero percent. So even if it's 40 bucks a month you're putting towards it, that's making a much bigger impact than if you have an interest rate of let's say 21 percent and that's really not going anywhere the principle balance just kinda keeps staying there.
Tons of factors to consider but again there's research, research, research for your specific situation.
Absolutely and if you have an accountant or if you can get access to an accountant that's another good time to speak to someone or another financial professional. Who can look at the exact specifics of your unique situation and make sure you're not pulling money out when you shouldn't. Particularly, right now when we're in a down market and you could really be doing more damage to your future retirement savings by pulling it out of the market to early.