the true cost of alternative financial services

Posted : February 6, 2018
Last Updated : February 6, 2018

the true cost of alternative financial services

Getting credit isn’t cheap. However, getting a bank loan is usually less expensive than the following alternatives.

Rent-to-Own Services

Rent-to-own services let you use an item for a period of time by making monthly or weekly payments. If you want to purchase the item, your rental payments will be partly credited toward the purchase price. The store will set up a plan for you to rent the item until you pay enough to own it. If you choose not to purchase the item, you’d simply be renting the item to be returned at the end of the rental period.

The store is the legal owner of the item until you make the final payment. If you miss a payment, the store can take the item back. If this happens, you won’t own the item, and you won’t get your money back.

Rent-to-own agreements are technically not loans, so no interest is charged. However, the difference between the cash price (if you were to buy the item outright that day) and your total payment (the total of your rental payments over time) is like the interest you pay on a loan. Generally, using rent-to-own services is more expensive – sometimes much more expensive—than getting a consumer installment loan to buy the item.

Payday Loans

Payday loans are short-term loans (usually up to two weeks). You write a post-dated check and receive cash that day. The loan service cashes the check on your payday to pay the loan in full. You can also go into the loan office and pay your loan with cash, at which point the lender returns your uncashed check to you.

You must be careful of payday loans. They’re usually made to people who need money right away and plan to pay it back with their next paycheck. However, payday loans can be much more costly than they appear at first glance. If you don’t have the money to pay the loan within the agreed-upon time period, the lender will renew the loan and charge you additional fees. This will increase the total amount you owe.

Refund Anticipation Loans

Refund anticipation loans are short-term loans secured by your income tax refund. Although the business preparing your income tax return will give you the money, you’re actually receiving a loan from a bank or finance company. You may not realize how much this loan is really costing you because you don’t have to pay any fees associated with obtaining a refund anticipation loan at the time you receive the money.

When you electronically file (e-file) your tax return and request direct deposit, your refund is often deposited in your bank account within two weeks. Sometimes refund anticipation loans take just as long, yet cost you substantially more money.

Many organizations host Volunteer Income Tax Assistance (VITA) sites. VITA is an Internal Revenue Service (IRS)-coordinated program that provides free income tax assistance and e-filing. Income eligibility restrictions may apply. Contact the IRS for a location near you.

When You Need Money Fast

Many people have turned to alternative financial service providers such as pawnshops, car title lenders (for a loan secured by the borrower’s car), and payday lenders (for unsecured loans that borrowers promise to repay out of their next paycheck or regular income payment). While many nonbank lenders advertise quick and easy cash, their services tend to come at a steep price and can trap you in a cycle of debt. Here are some tips for finding emergency cash at affordable prices.

  • Borrow from Yourself -- The best way to avoid a cash crunch is to put money into an emergency savings account that you can use to pay for unforeseen expenses. You might even link this savings account to your checking account to protect yourself if you were to ever overdraw your checking account. Experts say this emergency savings account should equal about three to six months of living expenses to get you through a difficult period without having to take out a loan or borrow from retirement savings. If saving money seems impossible to you, consider making small, simple changes in your habits or banking practices. Possibilities include having your paycheck directly deposited into your checking account with a portion automatically placed into an emergency account.
  • Comparison Shopping -- If you need to borrow money, it pays to comparison shop. When comparison shopping for loans, look at both total dollar costs and the APR. Payday lenders, for example, typically charge about $15 for every $100 borrowed. So, on a $500 loan for two weeks, you’d pay $75 in interest. That might not sound like a lot of money to pay for a small loan, but it translates to a whopping 391 percent APR! If you renew or roll over the $500 loan for another two weeks, you’d pay an additional $75 in fees. At that rate, in just 14 weeks, you’ll owe more in fees ($525) than the original loan!
  • Emergency Cash Options from Banks -- Many banks offer reasonably priced, small loans that enable you to borrow money and repay the money (plus interest) later. One example is a line of credit, which you can use to borrow money for a short period of time. It’s best to work with your bank to set up an account in advance instead of waiting until you’re in a rush to get cash. As with any other loan, you’ll be told the APR before signing a formal agreement.

If you need cash quickly, be cautious of using fee-based overdraft programs to deliberately overdraw your account. The costs can quickly add up depending on the number of transactions covered.

Ultimately, it’s a good idea to open and build up a savings fund to cover unexpected expenses. That way, you can borrow from yourself and avoid paying interest and fees.



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