Most of us “working class” individuals are stuck in a vicious cycle of debt where we’re spending money “hand over fist”, “robbing Peter to pay Paul” or are living “check to check”. OK you’ve had enough of the ephuemisims, now what are the solutions?
I’ve developed my own “long range” solution for getting out of the numerous payday loans I’ve accumulated trying to stay afloat as a result of my move to the seven cities. Payday loans are a great way for immediate expenses, but consumers aren’t told that they have to pay the entire principal plus the interest, in order to absolve themselves of the debt. The companies know that the consumer will come back one payday after another because while the cost of the interest could be absorbed by the consumer, given some grace on paying back the principal, paying back both and taking a loss that significantly exceeds what was borrowed to begin with in such a short cycle isn’t something the consumer is willing, or able, to do.
These are a few ideas I have on repaying that debt, and easing the transition for consumers in the process. These examples rely on the typical upfront 15% interest that is typically charged on a loan (391% APR)
1.) Companies will allow consumers to partially pay off the debt prior to the payday, not because they really want to, but due to state laws. Consumers can significantly reduce their debt by paying whatever extra money comes their way towards the interest first, then the principal. For example say you have a $500 loan, the maximum here in the Commonwealth. You get a tax refund for $300. You’re probably going to have to pay $575 to the check cashing outfit. You could pay the $300; $75 of which would immediately go to the interest, $225 towards the principal. You would then be paying fees on a much smaller loan, one for less than $300 (the new interest has to be recalculated, which is more complex than simply reissuing the loan for $175). You loose your refund, but if your check is only $600 anyway and you’re reloaning just to keep $525 in your pocket, it is well worth actually NOT to loose a sixth of your check to interest.
2.) Reduce your loans yourself; for example, if the check cashing place allows you to reduce your loans by a small amount, like $10, and your loan is $300, you’re only loosing the $45 plus the $10 in the interim ($55), but gaining a slightly less amount back on your next paycheck ($43.50). You took the hit this week and made it up next, but the $12.50 you’re getting back cushions the blow a bit. If you’re dealing with your standard outfit, however, you have to make your reductions in $50 increments. This really hurts consumers, because dropping a $500 loan down to $450 typically costs around $125 up front ($75 plus $50), though if they can do it they’re only paying $67.50 interest the next time around, as opposed to the $75. But as you can see that risk minimizes, the second time around, dropping from $450 to $400, their loss is reduced to $117.50 upfont.
3.) Paying the entire loan back ahead of time, principal and interest. Consumers may not be aware of it, or have considered doing this, but the interest is not set in stone. That’s right, if you have a $500 loan, the $75 in interest is based off of the ASSUMPTION that you’re going to pay it back on your next pay day. If you pay off the loan early, you’re not going to have to pay back the entire amount of the interest because it doesn’t cost the bank as much because they aren’t extending the loan for as long. In fact that interest does not truly go into effect until the following day to begin with.
4.) Once you are out of the loans, stay out of the loans. Only borrow when you absolutely need to, not to maintain a “comfort” level or to hide behind a lifestyle based on conspicuous consumption. This isn’t like the credit card that you can pay on for the rest of the following tax year, these interests can and will overwhelm you in a very short period of time.
Do not pursue other loans to float the loans that you have; if you’re like me, and you’ve done this, you’ll quickly see that before you realize it, a significant amount of your income is going towards paying the interest, probably somewhere in the vicinity of up to half of what you’re bringing in, perhaps as little as a third or less (if you’re making more to begin with, though this is more than enough). Consumers, even if they do eventually re-loan, can save themselves a lot of money in interest over time, and by following the suggestions above, can take control over their loans before the government does; lawmakers in various states are considering eliminating or reducing the amount of money that can be taken out, and you do not want to be in the position of going to the check cashing place just to find out that you can only borrow half of what you were accustomed to receiving, or that certain loans are denied to you altogether.