Tuesday, August 1, 2017

I Took Out A Loan From a Payday Lender!


I just heard a collective gasp from all of my readers.  However, once upon a time, Larry and I took out a loan from a payday company.  It was really quite unintentional.  We were buying new windows for our first home.  I had received a small inheritance, which would cover the cost.  The salesman offered us "180 days same as cash" financing.  We explained that we paid cash for home improvements - in fact we paid cash for everything.  The salesman actually had no problem with our decision, even smiling and nodding approvingly.

We Listen to Bad Advice

Then the next day, we mentioned our plan to some family members.  Immediately, they responded with a deluge of objections.  "You are being so foolish.  Think about the opportunity you are missing!  Current interest is 5 percent!  You will lose several hundred dollars by taking that money out of your account!  The window company  is charging you zero percent to borrow that money!  There is no downside!  There is no risk involved!"

The next day we took their advice.  Yep!  We called the rep back and told him that we were accepting the financing offer.  He was speechless.  Were we the same couple that he had spoken to 24 hours ago?  We had seemed so financially solvent, so secure in our plan, so fiscally conservative.  He asked our reasoning.  When we explained our skewed thought process to him, he spent a good amount of time trying to talk us out of it.  He warned, "This is with a high risk lender.  If you default, the interest rate is 24%.  Are you absolutely certain that you want to do this?"  We were sure.  I think he almost shed a tear or two as we signed the papers.

What's so bad about these loans?  

Let's pause here for an educational moment.  When friends, family members, or salespeople use the words "opportunity", "interest", and "money" all in the same breath, don't hesitate for even one second.  Run the other way!

"Same as cash" pitches are routinely hawked by a variety of retail establishments.  But, the actual offer is not really coming from your local furniture store or car dealership.  The loan is being underwritten by a third party company.  Yep.  "same as cash" is just a fancy way of saying LOAN.  Lenders are not philanthropists.  They are in the business of using money to make money.

Over 75 percent of these short-term loans are not repaid in full by the end of the grace period.  Sadly, most people don't realize the penalty for even one late payment.  If you don't pay back every cent you owe, the lender backdates the entire amount of interest to the FIRST day of the loan.  In other words, you then owe upwards of 24, 30, or 38 percent interest on the ENTIRE amount and it will be charged from Day 1 of the loan.  No exceptions.  No mercy.  It's all spelled out in the fine print of that two or three page contract.  Whew! 

I gasped when the loan payment booklet arrived in the mail.  It was from one of the best known payday lenders in the area.  Reality slowly dawned on me.  Somehow I had thought that the loan would be through a reputable banking institution.  I made the obligatory payments for two months and then I just could not take it any longer.  Earned interest was just not worth the angst that I felt every time I saw that payment booklet.  We had worked very hard to pay the house off in five years.  I could hardly believe that we had let ourselves be talked into a loan from payday company - even at zero percent interest for six months!

We Escape from the Trap!

I marched into that payday lending institution and told them I was prepared to pay off the entire amount remaining on the loan.  The eyes of the lady behind the counter widened in disbelief.  "But you have four more months on the loan.  Why would you want to pay the entire amount?"  She leaned forward slightly, lowered her voice, smiled, and almost conspiratorially whispered,  "Are you absolutely certain that you have the money available to do this?"

I stared into her eyes, and replied with an ardor generally reserved for repenting at a revival service, "Yes!  I just can't take being in debt one more single minute.  We've been debt free for many years, including our home."  Thrusting the precious final payment across her desk like it was infused with a deadly virus, I nearly shouted, "Here!  Take my check!"

She had me sign a paper and I was officially set free from the the demons of debt.  I did not see, but rather felt, her bewildered gaze as I left.  I don't think that I represented the reactions of her average customer.  Over 15 years later I still feel a twinge when I pass that establishment.

Tips for Avoiding These Loans:

My story had a happy ending.  But, most don't.  Here are some tips for avoiding the "same as cash" trap:

1.  Don't shop for furniture or a car unless you have either cash in hand or nerves of steel.

 I mentioned in  Part 5 of my Debt Free Living series that Larry and I went to open houses for 20 months before we bought our second home.  We were in the midst of saving 40 percent of our yearly income in order to pay cash for a home.  We knew beyond a shadow of a doubt that we were not purchasing a home until we had cash in our hot little hands.  It is interesting to add that an extremely frustrated realtor at an open house tried very, very hard to induce us to change our minds.  Temptation passed and we remained strong and resolute.  So, if you even have a shred of doubt that you will stay true to your debt free pledge, then stay out of the stores until you are prepared to purchase.

2.  Ask for a cash discount. 

After narrowing down your choices, ask the salesperson (with whom you have hopefully developed a friendly rapport) if they offer a discount for paying with cash.  Many places of business offer between a 5 and 10 percent discount for paying upfront.  I hardly need mention that this discount is either equal to or greater than the supposed amount of interest that I was gaining by taking out our Same as Cash loan when we bought our new windows.

3.  Live with a written list of short, medium, and long-term goals.

Most purchases are not emergencies.  They can be planned and saved for in advance.  I know from experience that if you live below the national median income, this step is absolutely, positively critical to your financial success.  Avoid debt like a stranglehold from the depths of perdition!  It will most assuredly effectively and abruptly narrow your options.  Soon the only door that will appear to be open is the one that leads to the trap of living from one paycheck to the next.  Resolving to live within your means, paying with cash, having a budget, leaving yourself margin each month, and planning for future goals will broaden your choices in unbelievable ways! 

4.  If you don't have the money, then stop what you are doing and pray!

 I mean this sincerely.  I am not just saying it.  My boys would tell you that when they were growing up, there were many, many times that they wanted or needed something and it simply wasn't in our budget.  I would always smile and reply, "Well, let's pray that in."  We went to God, prayed, and waited.  Delayed gratification was their well-known companion.  But, what joy when we found what they wanted or needed at a price that we could afford and they knew that God had heard and answered! 

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