University of Illinois Extension

Avoid Money Traps

0% Interest/No Payments Until . . .

When a lender offers no interest for a certain time, like six months or longer, the interest rate will be higher than for other loans, often 20 percent or higher. Check the “fine print” to see if there is a clause in the contract that states that if you miss a payment, the interest charges will be charged.

And, you had better have the amount that is due when the offer period ends. If you don’t, you’ll be charged the interest from the date of purchase which could be a large amount.

Rapid Refund Services

A Refund Anticipation Loan (RAL) enables you to get your tax refund from the government immediately without waiting for it to come in the mail. These services prepare your tax return, file it electronically, and charge you a large fee.

Typically, you borrow less than the anticipated tax refund, and all of the tax refund goes to the lender. Interest rates usually range from 25-200 percent although the APR is rarely stated. Instead, a fee is quoted. If the tax preparer makes an error preparing your return or you don’t get all or any of the tax refund, you still have to repay the loan plus the interest!

Instead of using a rapid refund service, you can file your return electronically through the IRS or a free tax assistance program. Several programs are available throughout the state. Contact the Volunteer Income Tax Assistance (VITA), 1–800–TAX–1040 or http://www.revenue.state.il.us/ for information. The Tax Counseling Project (TCP) of the Center for Economic Progress also operates free tax preparation sites in 28 communities throughout Illinois. For more information on site locations and hours of operation, call 1–888–827–8511 or visit http://www.centerforprogress.org/.

Rent-to-Own

Rent-to-own plans allow you to have an item, such as furniture, with little or no down payment. You pay a monthly rental fee and eventually own the item. You may actually be renting used items. Your contract should disclose whether the item is new or used, the weekly rental cost, the length of rental, and the total cost of the item. It’s important to read the small print!

One problem is you don’t own the item until all the rental payments have been made. If you pay late or miss a payment, you can lose the item no matter how much you’ve already paid.

The amount you pay in rental payments is much greater than if you had purchased the item and financed it through a bank loan. For example, a $300 television set rented for $15 a week for a year would cost you $780–a total of $480 in finance charges! In this example, the finance charges cost more than the television! Rather than paying these high costs, consider alternatives, such as saving money and paying cash or using a layaway plan.

Pawn Shops

A pawnshop gives single-payment loans for short time periods, usually 30 days. Loans may range from $20 to several thousand dollars. The amount of the loan is based on the item given as security (collateral), which is typically one-third to one-half the value of the item pawned.

For example, if you pawn a watch worth $100, you’d probably only receive $25–$30. You agree to repay the loan, plus interest, by a specified date or you forfeit the rights to the item pawned. The interest charged is usually about five percent per month plus a two percent monthly storage fee. This may not sound expensive, but the APR in this instance is 84 percent. Because the amount loaned is only a small portion of the value of the item pawned, the effective interest rate is greater than 200 percent annually.

Finance Companies

Loans from finance companies will typically be for longer time periods than typical payday loans. The interest rates are likely to be fairly high compared to a bank loan. A finance company may also pressure you to purchase credit life insurance and credit disability insurance, which will add significantly to the cost of the loan.

Consolidation Loans

If you have a lot of debts with multiple payments each month, you may be tempted to get a debt consolidation loan. Typically, when you get a debt consolidation loan you exchange paying several smaller debts with varying payment dates and interest rates with one large loan, interest rate, and monthly payment.

Because you have combined your debts, you will usually have a lower payment each month. However, the interest rate for the consolidation loan is often at a higher rate, and the time it takes to repay the debt will be significantly longer.

There may be several problems with getting a consolidation loan. Many people are tempted to start charging again before the debt is paid. Some of the debts included in the consolidation loan may have been interest-free, such as doctor or hospital bills. Also, don’t include any loans that may have only a few payments left. If you do, that loan will not be paid in full until the consolidation loan is paid.  And, for many families getting a consolidation loan may be the final step before a real financial disaster.

Before getting a debt consolidation loan, contact your creditors to see if you can negotiate a repayment plan. Do your homework to figure the cost of the consolidation loan and how long it will take to pay it off. Go to http://powerpay.org to input your debt information to help you make your decision. You must also decide that you cannot take on any new debt until you get your old debts paid off.

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