Borrowing Against Your Future?


“Brand New TV, All Yours for the Low Price of 19.99 per month!”

Sounds tempting right? But what seems like an appealingly low monthly payment could actually cost you hundreds in the long run. Consumers are borrowing against their future and, perhaps unknowingly, choosing high interest rates in the process so they can obtain their desires or needs upfront.

Payday lending and rent-to-own businesses surged after the financial crisis of 2008. Many people living paycheck to paycheck felt they had no other option but to seek out payday lending and/or rent-to-own options in order to get by. The scary pattern continues today.

The problem lies in the fact that most consumers using payday lenders and rent-to-own services don’t recognize the disastrous financial effects these services have. Smart marketing makes expensive lending seem cheap, easy and accessible. But these loans are designed to be nearly impossible to pay off, leading to a cycle of debt. Unfortunately, people will continue to partake in deals with these companies as long as the opportunity exists.

Here are two of the most common ways that people continue borrowing against their future with poor financial results:

Payday Lending

We’ve warned against the danger of payday loans in previous posts and it continues to be a hot topic. A reporter recently signed up for an online payday loan using a fake address and social security number and wrote about the process in a recent article. The results were downright scary. Not only was the reporter able to qualify for a short-term loan, the ease in obtaining quick cash by using non-existent credentials was frightening. The offer she received would have cost $225 in interest charges, which amounts to a staggering 1,300% APR! She rejected the offer but lenders continued to harass her for the next month.

Insane interest rates and unrealistic payback terms make payday lending a dangerous choice for the any consumer. A study by PEW Charitable Trusts reveals that the average payday borrower can only afford $100. Those borrowing from payday lenders are often financially vulnerable to begin with.

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Here’s how rent-to-own works: If you don’t have enough cash on hand to purchase a product up front, you can choose to rent the product through certain companies. You are then expected to pay a series of monthly payments for the rental fee.

If you ever stop making monthly payments, the item must be returned since that means you’ve stopped renting it. You have the option to continue these payments until you eventually own the product.The problem is, by the time you’ve made enough payments to own the product, you’ve already essentially paid double, triple, or even quadruple it’s original price.

It works in a similar way to a car lease. For instance, if you want a new mattress, you can rent it for a monthly fee. You can own it after paying these monthly fees for a certain amount of time (let’s say 90 months) but the monthly costs will add up to a price much higher than the original price.

In theory, it’s a viable option if you can’t afford something up front. In practice, it guarantees extremely poor returns for the person renting the item. You can end up paying $800 dollars on a vacuum that has a retail price of $180.

So why would anyone choose this option when it has no long-term financial benefit?

Financial hardship, lax regulations and inability to access other types of credit like traditional bank loans and credit cards. Offers to pay a lower monthly payment over time can be tempting when you’re struggling paycheck to paycheck. Additionally, the ease in which an individual can obtain a short-term loan or rent-to-own is astounding. The limited regulations have made such practices an accessible (and dangerous) choice.

What is the alternative?

Save for the item so that you can buy it in a lump sum.

It’s not the solution that will help you achieve your desires sooner, but it is the best financial strategy. It’s the common sense solution, but it’s also the best financial decision. If you put away a planned amount every single month, you can save up enough to buy the item upfront rather than playing “catch up” with monthly payments. If you pay upfront you won’t be susceptible to interest, to late payment fees, and the huge mark-up over time. It’s an exchange that gives you the highest return on your purchase.

The good news

Payday lending is no longer the business that it once was. Officials have taken steps to regulate the practice more strictly and even gone so far as to limit ads. This gives hope that payday lending could become a predatory practice of the past.

However, even with the heightened push-back against payday lending you should still take every precaution to protect yourself and your finances. If you’re not sure whether the offer that you’re considering is really predatory, then just take a look at the cold, hard numbers. Nothing else will show you more clearly the long-term impact of a short-term benefit.


Image Credit unprose

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