Recipes for Financial Fitness

Controlling Finances

How would I know when financial services are priced too high?

You have probably seen ads for check-cashing stores, payday loans, pawnshops, and rent-to-own stores. They provide short-term loans. Maybe you’ve used these services. Have you ever taken a close look at the costs to use them? Have you ever compared those costs to similar services offered by financial institutions?

These services are expensive, quick-money fixes. Let’s take a look at each one.

Close this window >>

Check-Cashing Stores

These stores charge you a fee to cash a check. Fees range from $3 to $4 for every $100 you cash. Maybe that doesn’t sounds like a lot of money, but if you use these stores a lot, you could pay hundreds of dollars a year in check-cashing fees.

Close this window >>

Payday Loans

To get a payday loan:

•

You show the store proof that you can pay a loan back on your payday. An example of proof would be pay stubs from prior paychecks

•

Then you write a post-dated check for the amount you want, plus the store’s fee. These fees can range from 15 percent to 30 percent of your check amount. This means that for a payday loan of $100, you might pay a $15 fee (15 percent). For a payday loan of $200, you might pay a $60 fee (30 percent).

•

On the day the store would deposit your post-dated check, you have a few choices:

•	Redeem your check with a money order or cash.
•	Let the store deposit the check.
•	Renew the loan by writing another post-dated check to cover the previous amount. With that, you pay another fee.

Some check-cashing stores also make payday loans, usually to people who work full time. Payday loans are an expensive form of credit (get money now, pay it back later).

Over time, you could pay big bucks—money you could put toward your financial goals or building an emergency fund.

For more information on payday loans, read the Federal Trade Commission’s article: "Payday Loans = Costly Cash"

Close this window >>

Pawnshops

Pawnshops loan you money in exchange for an item such as a watch, camera, or car title. The pawnshop is expected to keep your item for at least 30 days. During that time, you are expected to repay the loan. If you don’t, the pawned item becomes the pawnshop’s property. It will sell your item and keep the money.

What’s so bad about that? You’re good for the money, right? Well, these shops make loans based on about half of what your item is actually worth. If you are unable to pay the loan back on time, you are out something you may need and have to spend money to replace it.

The bottom line: If you deal with a pawnshop, you accept a small amount of money and risk losing a possession of much higher financial or sentimental value.

Avoid pawnshops.

Alicia’s Story

In January, Alicia needed money to pay her holiday bills. She owned a car worth $5,000 and thought a car title loan from a pawnshop was a good idea. When she showed the shop her title, it offered her $1,000. She thought that was a low loan amount considering what her title was worth, but she accepted the deal. Alicia handed over her title in exchange for the loan. She promised to pay back the loan in six months.

In short, this is what the loan cost Alicia:
Loan Amount	$1,000 (pawnshop kept the title to her car, worth $5,000)
Interest charged	$600 (10% a month for six months)
Repossession charge	$50
Car storage charge	$150 ($5 a day for 30 days)
Total cost	$1,800

Each month, the pawnshop charged her 10 percent for the loan, plus the loan payment. In May, Alicia could not make her car loan payment. The pawnshop came and took her car away, then charged her a $50 repossession fee. In June, she had the money to pay the balance of the loan, plus the $50 fee, and got her car back. When she went to pick it up, the shop charged her another $150 for car storage. The shop also told her they were getting ready to sell her car.

Alicia was shocked that she came so close to losing her car and paid, in effect, an 80 percent interest rate. After paying back the loan and getting her car back, Alicia made two promises to herself:
1. Never again use her car title to get a loan.
2. Never to overspend on holiday gifts—getting a loan to pay for them is too costly.

Close this window >>

This is what your $400 TV costs you:
Weekly rental	$15.95 x 78 weeks =	$1,244.10
7% sales tax	$1.12 x 78 week =	$87.09
Delivery fee	$15 (once) =	$15
Total cost of rent-to-own TV =		$1,346.19
For $1,346.19, you could have bought three TVs and had $146.19 left over.

Rent-to-Own Stores

Rent-to-own stores provide items, such as furniture or appliances, for rent. Part of each rental payment goes toward buying the item. Part of each payment also goes toward paying expensive rental fees. So expensive, that by the time you’re finished with making rental payments, you end up paying far more than what the item is worth.

Say you want a TV and you priced a new one at $400. But, you don’t have the cash to buy it. Instead, you go with a rent-to-own plan for the same TV.

A better option is to save for the TV. You can put what you would have paid in expensive fees toward your financial goals or set aside money for your emergency fund.

Avoiding Expensive Financial Services
If you use these types of services regularly, here is a short exercise to help you try to stop using them:

If you use payday loan services, calculate how much it costs you to use those services over a period of a month.

a.	Each time you use one of these services, make a note of all the fees you pay.
b.	In a month, total up the fees.

Use the Financial Services Fees: Tracking Log Worksheet >>

Review the short-term goals you listed on your SMART Financial Goals Worksheet. What short-term financial goals could you reach if you were able to save the amount you spend in payday loan fees?

Make a plan to do two things:

a.	Plug spending leaks so you can stretch your money until payday and avoid payday loans.
b.	Find a cheaper way to cash your checks. Take a trip to a bank in your neighborhood. Find out what it would cost to open a checking account. Make a list of fees and requirements to open the account. Compare the cost of services.Which one is cheaper to use?

<< GO BACK | GO FORWARD >>