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Why I Hate Payday Loans

I hate payday loans and payday lenders.

The way a way a payday loan works is that you go into a payday lender and you sign a check for the amount you want to borrow, plus their fee. They give you money that you don’t have to pay back until payday. It’s generally a two-week loan.

Now, this two week loan comes with a fee, so if you want to borrow $100, they’ll charge you a $25 fee, plus a percent of the total loan, so for that $100 loan, you’ll have to pay back $128.28.

That’s only 28% of actual interest; that’s not terrible. However, if you prorate that to figure the APR, which is what everyone means when they say “I’ve got a 7% interest rate”, it comes out to 737%. That’s nuts.

They are a very bad financial plan.

Those loans may save you from an overdraft fee, but they’ll cost almost as much as an overdraft fee, and the way they are rigged–with high fees, due on payday–you’re more likely to need another one soon. They are structured to keep you from ever getting out from under the payday loan cycle.

For those reasons, I consider payday loan companies to be slimy. Look at any of their sites. Almost none are upfront about the total cost of the loan.

So I don’t take their ads. When an advertiser contacts me, my rate sheet says very clealy that I will not take payday loan ads. The reason for that is–in my mind–when I accept an advertiser, I am–in some form–endorsing that company, or at least, I am agreeing that they are a legitimate business and I am helping them conduct that business.

In all of the time I’ve been taking ads, I’ve made exactly one exception to that rule. On the front page of that advertiser’s website, they had the prorated APR in bright, bold red letters. It was still a really bad deal, but with that level of disclosure, I felt comfortable that nobody would click through and sign up without knowing what they were getting into. That was a payday lender with integrity, as oxymoronic as that sounds.

Payday Loans Suck

Finance

: Image by vonglee via Flickr

A few weeks ago, I was approached about placing ads on this site. I was excited when I read the email. It came from a real domain, didn’t involve any Nigerian princes or wire transfers for overpayments.

Over the course of the email conversation, it was determined that, for a fee, I would place some links in a few archived posts. It would just be links to improve search engine ranking, without being an eyesore for my current readers. I don’t have a problem with that. The intrusiveness is similar to Chitika ads, which are only visible to search traffic. It’s a nice way to advertise: monetization without alienation.

Then I saw the links. I was being offered money to promote payday loans.

Payday loans offer to loan you–for example–$100 for the low(snort) price of just $25. That’s not bad. Only 25%. I know some credit cards that aren’t that good. The catch is that the loan is due in full in 2 weeks. That gives it an APR(Annual Percentage Rate) of 650%. That’s not so good.

When you payback the loan, your paycheck is pre-spent by whatever you borrowed, plus the pound of flesh fee and you are that much more likely to need their services again, digging you even deeper.

It’s not like the target demographic is terribly affluent. These are people who not only can’t make ends meet, but also can’t acquire traditional credit. They are left paying this insulting fee.

I consider payday lending companies to be immoral, unethical and generally, more than a bit dishonest. These are the people who give decent, hardworking capitalists a bad name. I’d rather go to a mob loan shark. He’s at least honest about what he is.

They got shot down.

Don’t get me wrong, I enjoy making money. I also enjoy the money I make here.

But not at the expense of my soul or my integrity.

Consolidating Student Loans

Finance

This is a guest post.

If you owe on multiple student loans, you may have heard of or are considering consolidating your student loan debt. Whether you are fresh out of college or struggling with making multiple student loan payments, consolidating your debt can relieve you of that burden in exchange for one manageable monthly payment.

What is Student Loan Consolidation?

Student loan consolidation is one personal loan big enough to cover the amount owed on multiple student loans. The loan amount you receive is used to pay off the other student loans which leave you with a single monthly payment to make. You can consolidate all federal student loans with a debt consolidation program through the US Department of Education. Although FFELP, or Federal Family Education Loan Program, no longer offers debt consolidation, you can still be eligible through the US Department of Education. You may also still qualify for the federal student loan consolidation program even if your college does not participate in the Direct Loan Program. Many private lenders also offer student loan consolidation options as well.

Eligibility Requirements for Student Loans

You may be eligible to consolidate student loans if you are enrolled at part time status or less or if you are no longer in school. You would also be considered eligible by most lenders if you are within the loan’s grace period or are currently paying on your loans. You should also have your loans in good standing and have at least $5,000 owed in student loans. Each loan consolidation lender may have their own eligibility requirements, so it is best to check with the specific ones you are considering.

The Benefits of Loan Consolidation

There are numerous potential benefits to consolidating student loans including streamlining multiple payments into one affordable monthly payment. You may have multiple due dates on loans and you may be struggling to remember which one is due on which date. Streamlining your student loans is simpler and easier to remember, it also allows you better control over your budget.

Another benefit of choosing to consolidate student loans is extending the repayment terms. Many student consolidation loans can be obtained as long-term debt. Although it will require you to pay your loan for a longer time period, it does reduce the amount paid each month into a more affordable payment.

You will also pay a lower interest rate with a consolidated loan. The interest rate is determined by weighing all the interest on your loans and finding the average rate. You may have variable interest rates on your student loans and consolidating them can give you a fixed rate which is highly advisable given the uncertainty of the US economy.

A lowered interest rate and a longer repayment term mean a lower monthly payment than what you were currently paying on multiple loans. A smaller monthly payment leaves more money in your pocket at the end of the month and allows you to use that money elsewhere.

The Disadvantage of Debt Consolidation

It is important to be aware of all aspects of a student debt consolidation loan in order to make the best and most informed decision. There are some drawbacks to consolidating debt including having a higher repayment term which means you, in the end, will be paying more than if you paid it off sooner. You will also end up paying more in interest on a long-term loan than a short-term as less of the monthly payment is applied to the principle. You may also have to pay prepayment penalties depending on your original student loan terms. There are some student loans that prohibit paying them in one lump sum or ahead of the schedule without incurring a monetary penalty. You may also be required to repay any waived fees or rebates. Check your current student loan contracts to find out if you may be penalized for paying off the debt through a consolidation program.

Unfortunately, there are countless fraudulent and unscrupulous lenders trying to talk you into consolidating your student loans with enticing introductory rates or temptingly low monthly payments. However, it is essential to read all the small print before signing any contract in order to avoid the numerous scams out there. You should be wary of any lender that is promising really low interest rates. You can determine your potential interest rate by compiling all the student loans, adding their interest rate and determine the average. You may have to round up to the nearest one-eighth of a percentage. Beware a lender that promises an interest rate significantly lower than that interest rate.

Make a Budget

Finance

: Image by r.lovewell via Flickr

In the past, I’ve gone through a detailed series of budget lessons demonstrating how to make a budget and showing my personal budget spreadsheet template. If you weren’t here to see them develop, you probably haven’t seen them at all. I’ve never built an actual index for those posts.

This is the master index of my budget planning resources. As I develop more, this will grow.

Budget Lesson #1 – In this lesson, I go over how we handle discretionary income and I explain our modified envelope system. The discretionary budget contains things like our grocery bill, or the clothes we buy. We have near-total discretion over what is purchased, hence the name.

Budget Lesson #2 – Lesson #2 contains the details of our monthly bills. These are the ones that are consistent, predictable, and actually due each month. Most people take these for granted as the bills they have to pay, but it’s not true. You can get almost all of your regular bills reduced just by asking. You would also be surprised what you can do without, when properly motivated.

Budget Lesson #3 – This is where I explain how we deal with the non-monthly bills. That is, the bills that have to be paid, but are not due on a monthly basis. I also share the personal budget spreadsheet template I developed. I am working on a few sample templates to match various imaginary scenarios. If you’d like to be an anonymous case study, and get free help setting up a budget, let me know, please.

Budget Lesson #4 – In this lesson, I describe our “set-aside” funds for things that will need to be paid eventually, but not on a set schedule. Sometimes, they are never actually due. We set aside money for the parties we throw, for car repairs and for a number of other things. A few of these items are outright optional, but they are part of what makes life fun. You can’t make a budget without including some of the extras.

Budget Lesson #5 – This is the companion piece to lesson 2. Learn how I’ve reduced–or attempted to reduce–each of these bills. For the better part of two years, I called Dish Network every few months to ask for a discount. For almost 2 years, it was granted. Then one, day, they told me they were putting a note on our account to keep us from getting any more discounts, so I canceled. 100% discounts help us save more.

Budget Lesson #6 – This is the reduction companion to lesson 3. These bills are harder to reduce. Have you ever successfully gotten your property taxes lowered?

Budget Lesson #7 – This is the reduction companion to lesson 4. Notice a pattern, yet?

Budget Lesson #8 – Here, completely out of order, is the reduction companion to lesson 1. Watch as I magically reduce–or rationalize–our discretionary budget.

So, dear readers, what part of budgeting should I address next?

Debt Burnout

Finance

You’ve got a budget. You’ve got a debt repayment plan. You’ve been paying off your debt. You’ve even paid off a few of your smaller debts. Now you’re staring down the barrel of your big debts: your mortgage, a $30,000 credit card, maybe a car payment. You’re looking at months of payments with no quick wins; no more watching your debts die every few months. You’re in the middle of a very long slog.

All of the easy milestones have been reached and the next one is a year or more away. This is when debt repayment gets hard. How can you avoid getting burnt out doing the same thing, month after month, with no major visible progress?

1. Keep your eye on the prize. Try focusing on the end result, while ignoring the time it takes to get there. Do you have a reward planned for when you pay off your debt? If not, consider that to be your new shining goal-post. My wife and I plan on taking an Alaskan cruise when our debt is repaid.

2. Ignore the prize. If #1 doesn’t work for you, try focusing on just the current month’s progress. How much did you pay off this month? Was it more than last month?

3. Make micro-goals. Try breaking the long slog into bite-sized pieces. How fast can you pay off the next $1000? How many months will it take to pay off that TV you bought last year? Sometimes, meeting a smaller goal can make the whole works feel like it’s going by faster.

4. Take a snowball vacation. For just one month, take every dollar you would normally apply to your debt–except your required payments–and have some fun with it. Take a weekend trip, have a fancy dinner, or pick up that video game system you’ve been eying. Something. Anything to take your mind off of your repayment plan for a while. Be careful not to make this a habit or you will never get out of debt.

5. Start a blog to share your pain.

A debt snowball is a long, intense process. If you’re not careful, you can burn out and let the whole thing collapse. How do you avoid burnout?

Three Alternatives to a Budget

Finance

the envelope system: day one — Image by J. McPherskesen via Flickr

Budgets aren’t for everyone. For some people, the very idea of trying to track where their money going is painful. And that’s just the idea of tracking the money. It gets far worse when you’ve got $10 budgeted for coffee, $12 for fast food, $66.50 for gas, and $0.75 for entertainment. It’s can be hard to follow a strict budget for long.

If you know you need to track your money, and you also know that a strict, zero-based budget won’t work for you, what can you do? Luckily, there are alternatives.

1. Hope and Pray. This is otherwise known as the “Call my bank everyday and see how close I am to over-drafting” system. To fully embrace this system, you need to not only abandon a written–or even organized–budget, but you should also throw your checkbook register in the garbage. Make sure you’ve got a good overdraft protection account attached to your checking account and let your money take care of itself. This is the ultimate zen of personal finance. Don’t stress or worry, just hope for the best. This system works best if you make more money than Oprah and have modest tastes. For those of us who have to watch our money a bit to make sure the month outlasts our money, this probably isn’t a great plan.

2. The Envelope System. To implement this system, you do need to create a basic budget so know what you are obligated to pay. Once you have that done, take a stack of envelopes and label them for each item you have to pay. Add another envelope for food, another for entertainment, and another for miscellaneous because there is always a miscellaneous. Divide the money among the envelopes. Now for the magic. When you have to spend something, take the money out of the appropriate envelope and spend it. That’s it. If, however, there isn’t enough money in the right envelope, but you still need to spend the money, you have to take it out of a different envelope and spend less on the category that lost money.

3. Percentages. This is the simplest of the non-budget budgets. Take 50% of your money and spend it on necessities, like the mortgage, food, and utilities. The next 30% goes to savings and retirement. The last 20% is for fun or any other thing you want to spend it on. This naturally works best if you are out of debt, but if not, just make sure most of the 20% fun money goes to repaying debt. This system works best if your bills are automated and you will need to set up a basic budget first, so you can make sure your necessities come in under 50% of your income.

Not every budget plan will work for everyone, but there are always alternatives that can still help you manage your money.

How do you track your money?

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