The Great American Smokeouton November 17th, a day dedicated to helping people overcome their addiction to the smoking habit, reminded me that smoking isn’t the only addiction that can be hazardous to your health – or pocketbook. A pack-a-day- habit can easily cost $150 per month, and $5 you into the poorhouse.
In this economic environment where most everyone is acutely aware of how they spend their money, it’s interesting that we’re willing to look the other way when we need some fast cash, burying our head in the financial quicksand, and instead embrace the potentially damaging money at any cost attitude.
Desperate times may call for desperate measures, but those measures shouldn’t leave you worse off than when you began. Since quick fixes are often habit-forming, see if you’re guilty of any of the following behaviors, giving consideration to kicking your own financial addictions.
Payday Loans - On the surface, getting the cash you need may seem worth it at any cost. But it’s that cost and the addictive nature of seemingly easy money that can become financially back-breaking. To obtain a payday loan, you write a post-dated check for the amount of the loan plus any fees the lender tacks on. You then receive the amount of money you initially needed to borrow, promising to pay back that amount plus the fees. The term of the typical payday loan is one to two weeks, at which point the lender cashes your post-dated check. Most payday lenders will charge a certain dollar amount per $100 borrowed. For example, they may charge $15 for every $100 they loan you. Thus, if you needed $300 until your next paycheck arrived, your post-dated check would be for $345. What’s $45 when you desperately need $300?
Here’s the catch: that $45 represents an Annual Percentage Rate of 390 percent. You wouldn’t dream of taking out any other type of loan with triple-digit interest. And, if this isn’t bad enough, many consumers cannot repay the loan at term, and end up rolling it over, thus adding on more fees and interest.
Pawn Shops – People can do several things at pawn shops. They can borrow money by putting up something of value as collateral in exchange for cash, they can sell their merchandise outright, or they can buy the merchandise that is for sale at the shop. There are bargains at pawn shops, but only for those buying the merchandise, not for the sellers. Typically, the person pawning the merchandise receives a sum of money (usually nowhere near the true value of the item) which he or she agrees to repay with interest. If the loan is repaid by the end of the term, the merchandise is returned to the owner. If the loan is not repaid, the consumer can renew the loan, or the merchandise is forfeited.
What’s the problem? Again, it’s the interest and fees, with APRs typically in the triple-digit range once all charges are included. Further, some studies have shown that only 60 percent of pawners end up reclaiming their merchandise, thus they have essentially sold an item for cents on the dollar, something they wouldn’t otherwise do.
Rent-to-Own – Everyone wants nice things, and if the family is coming over for the holidays, you may be tempted to spruce up your home. A quick trip to the furniture or electronics store could confirm that a new living room set and flat panel TV are out of your price range. Then you notice an ad for similar items with affordable monthly payments.
It seems too good to be true, and guess what, it is. The problem once again lies in the interest and fees. For instance, if you bought a $200 item and agreed to make the seemingly affordable weekly payments of $15 for 78 weeks (basically one and one-half years), you’d end up paying $1,170 for that $200 item at an APR of 388 percent. Adding insult to injury, it is likely that you could have purchased the same item at a traditional store for a fraction of the overall cost.
By now you’re wondering why anyone would agree to the terms imposed by payday loan companies, pawn shops and rent-to-own businesses.
The answer is that people who utilize such concerns typically do not qualify for loans from banks or credit unions, and would not be approved for in-store lines of credit. Nonetheless, it’s critical to your financial well-being to understand that even though there is always a cost to credit, when that cost becomes unreasonable, you’re better off considering other options or doing without.
The real answer lies in breaking your addiction to these easy money solutions by probing to understand the root of the problem and resolving it. Admittedly easier said than done, but remember…no one cares more about your money than you do, and there’s no better time than now to take action.
Gail Cunningham is the Vice President of Membership and Public Relations National Foundation for Credit Counseling.