KNS Financial

Personal Finance From a Biblical Perspective

Be Wary of Short-Term Loans

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[The following is a guest post about the dangers of short-term loans.]

If you are facing a financial crisis, a payday loan may seem like the perfect solution to your problem. They usually offer to provide you with instant cash that may be in your bank account in just a matter of hours. They also promote the fact that they will lend to anyone with a steady job, even if you have no credit, or poor credit.

While this may seem like the answer to your financial problems, there are some things you should know about payday loans before making your final decision. Otherwise, what may seem like the perfect solution, may only add to your financial problems.

Payday Loans

How Short-term/Payday Loans Work

A payday loan company is likely to offer you a loan of up to $2,000 that you can spend on anything you want to. Through this loan contract, you agree to make regular payments to the lender until your loan is paid in full. They will attach various fees to your loan that you must also pay back in full. The application process is very easy and these companies do not do any type of credit check to see if you qualify for approval. As long as you have a steady income, you will probably be approved.

You may ask yourself why payday loan companies offer loans to people with little or poor credit when other lenders will not. This is because they set up an agreement with you where they are practically guaranteed to get their money back. This is because you agree to allow the payday loan company to withdraw the fund directly from your regular pay check or your bank account. These funds will then be directly forwarded to the payday loan company.

Repayments

It is very important that you realize the when you agree to a payday loan, you are authorizing the company to take funds directly from your pay check or bank account to cover your debt. Once you make the agreement, these payments will be automatic and there will be nothing you can do to stop the payments. This means that you will have fewer funds available to you every week until the loan is paid off.

If you are having the money directly deducted from your bank account and you do not have sufficient funds available, you are likely to receive an additional fee from your bank.

Added Fees

While the government has set some strict guidelines in place for payday loans, you will still repay a substantial amount more than you initially borrowed. Right from the start you will be charged a 20% establishment fee just for taking the loan out.  If you are taking out a $2,000 loan, the establishment fee would be $400. You will also pay a 4% monthly account fee on the balance you still owe. This will add up to a lot of extra charges.

For example, if you obtain a loan for $2,000 and plan to repay the loan over 16 biweekly installments, you will owe $190 every two weeks. This will equate to a total repayment of $3.040.00, which means you will be paying more than $1,000 more on a $2,000 loan. This does not even include late fees if you are ever late with one or more payment.

Alternatives To Expensive Short-term Loans

There are several alternatives to payday loans that you may want to consider. You definitely want to contact your lenders first and see if you can make alternative payment arrangements with them, so you do not have to take out a loan. You may also be able to borrow a small amount from a friend or family member and pay it back over a set period of time.

There are also some other loan alternatives, such as a standard bank loan or you may be able to obtain a low-interest credit card that you can use for some of your expenses. If you are low-income you may be eligible for specialty or Centrelink loans from bank and charity partnerships, such as the StepUp Loan and the No Interest Loans Scheme. If you receive payments from Centrelink, you may be eligible for an advance payment to help offset some of your current bills.

While taking out a payday loan may seem like a good idea initially, keep in mind how much you will need to repay in added fees. If you are not careful, this type of loan can actually add more financial stress on you than you currently have. This is because you will have to go with several weeks or months of decreased pay checks to cover all of your other expenses.

If you do obtain a payday loan make sure you read the contract through completely and that you are certain you will have the ability to repay the loan.

3 Reasons Looking At Monthly Payments Is A Mistake in Car Buying

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When most people think about owning a car, they usually think of it as a necessity, and not a luxury. I have seen many people rush into the decision to buy a car, thinking that they can’t live without one. Unfortunately, this can lead to plenty of car buying mistakes.

In my opinion, focusing on monthly payments is probably the biggest car buying mistake that one can make! Actually, whenever you are making a purchase based solely (or mainly) on the monthly payments, you are making a huge mistake.

How Monthly Payment Targets Can Lead To Car Buying Mistakes

Unfortunately, many people in this country have become accustomed to “buying” items without actually having the cash to pay for it. This has lead to an entire industry of furniture/mattress salesmen, real estate agents, electronics vendors, and even car dealers who try to sell you their product based on estimated monthly payment.

There are a number of problems with this (including funding your indulgences by borrowing), but I’ll only focus on a couple here:

3 Reasons Looking At Monthly Payments Is A Mistake in Car Buying

Price Is Rarely Discussed

When you are only trying to target a particular monthly payment amount, the price is rarely discussed. Most of the time, the salesman will simply ask you how much you are willing/able to pay each month.

I’ve had a number of car salesmen who virtually refused to discuss the total price, until I let them know how much I could “afford” per month. Of course, when I told them that I wanted to pay cash, they had to back off (or watch me leave)!

If you are buying a product, and you do not focus on negotiating how much you pay this item, then it will be easy for a salesperson to take advantage of you!

Monthly Payments Are Easy To Manipulate

The reason why the dealer is so eager to talk about monthly payments is because they can lower them without losing any money! Here are a few examples…

The salesman can arrange for you to pay a lower amount each month, simply by extending the length of your loan!

If you take out a $20,000 car loan at 8% annual interest for 36 months, your monthly payment will be about $627. Extend your loan period to 48 months, and your monthly payment drops to $488. Your salesman can bring it down to $406 if they set you up to pay for 5 years! If all you can afford is $350, simply agree to pay off this loan for a full 6 years, and you can afford your dream car (actually, you’d still be about $0.66 short)!

The same thing will happen if the dealer is able to workout a lower interest rate with their bank or financing arm. Using the above example, if your rate drops from 8% down to 5%, then your monthly payment will be about $599!

What you will notice in both of these examples is that your purchase price never changed! All the salesman did was manipulate a few of the variables in your loan, and he was able to fit into your budget!

This is why focusing on your monthly payment is one of the biggest car buying mistakes that you can make… The dealer can easily overcharge you for a car, and you’ll walk away ignorant and happy, because you like your payments!

You May End Up Paying For Unwanted Add-Ons

Anyone that has purchased a car from a dealer knows that there are other fees that can get tacked on to the purchase price. If you are only concerned with the salesman’s ability to get you a low monthly payment, then you may just gloss over these other fees, and pay for something that is unnecessary.

Also, many dealers will try to get you to take on extra packages and services, which you don’t need. Again, if you are only focusing on your monthly payment, you won’t see those things. For instance, if you agree to buy a car for $20,000, and you are asked to pay $24,000, then you can ask for an itemized list of taxes, fees, and other expenses, which make up that additional $4,000! But if you agree to “buy” a car for $450/month, you won’t even notice that they are there.

I remember a dealer adding a few thousand dollars to the purchase price of my current car. It was for services and/or packages that I declined, but he left it in the system. I was only able to tell because I was working with all of the numbers in my spreadsheet (not just a monthly payment)! It could have been an honest mistake, but either way, it would have cost me thousands of dollars for something that I didn’t want or need.

Be sure to look at the whole picture when pricing a car!

photo credit: freedigitalphotos.net

Reader Questions

  1. What are some of the ways that focusing on a monthly payment has lead to financial trouble for you?
  2. Have you ever noticed how car salesmen are so reluctant to talk about the overall price? How do you handle that?
  3. Has negotiating based on monthly payments ever worked out in your favor?

Why A Consolidation Loan May Be Worth Considering

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I know that many of you may think I’ve gone crazy with the title of this article – especially since I am trying to pay off debt myself – but I can assure you that I have not.

With interests rates being as low as they are right now, this may be a perfect opportunity to take out a loan in order to refinance debt or start up a business.

Don’t get me wrong, I still despise being in debt bondage, and I would still advise all of my clients, family, and friends to avoid debt whenever possible; but I also understand that taking out a loan isn’t always the worst option.

Here are a couple of situations for which getting consolidation loans might be the answer.

High Interest Credit Card Debt

Some people get into credit card debt because they decided to live above their means. For others, it may have been due to a few acts of desperation. Some may have even tried to take advantage of credit card benefits, and for some reason, were not able to pay off their debt.

No matter what the reason, if you are stuck with high-interest credit cards, it’s time to take action. First, call your bank(s) and try to negotiate a lower rate. If that doesn’t work, see if you have a card with a zero balance and a balance transfer offer. If your savings are higher than the transfer fee, do it!

If none of these options work, it may be best to take out a loan – be sure to take advantage of a personal loans comparison first from sites like http://www.comparethemarket.com/loans/ – and consolidate your credit card debt.

Student Loans

There are a growing number of people who are financing their higher education with the help of student loans. Unfortunately, many of those former students are then put into a difficult financial situation because of their high monthly student loan repayments.

Depending on whether you took out subsidized versus unsubsidized Stafford Loans (or some other instrument), you may end up owing a lot more than you realize once you’re out of the grace period.

Sometimes, the only option in these cases is to secure another loan, which will help you to lower your interest rate and/or extend the amount of time that you are given to pay back the loan – lowering your payments in the process.

Of course, your goal should always be to pay back any debt as quickly as possible, so don’t use your lower payments and a license to go wild with your spending!

Consolidation Loans For Your Car Note

Most people only think about refinancing their mortgage when overall interest rates in the economy drop. However, you can still save yourself thousands of dollars if you can get a new loan for your vehicle.

Don’t forget to compare any fees that you might have to pay with the amount of money you stand to save by refinancing.

The same exact things can be said about refinancing your mortgage – besides, people write about that so often that it gets boring! 😉

photo by Omar Omar

Reader Questions

  1. Have you ever had to take out consolidation loans for one or more of the reasons listed above?
  2. Do you think it’s a bad idea to try to fix a debt problem with more debt?

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