THE TRUE COST OF BORROWING
Everyone needs to borrow money now and then to pay bills or to cover unplanned expenses. But how you get that money—and how quickly you pay it back—can be the difference between making ends meet and making a mistake. If you don't have experience managing your bills, you and your family can get stuck in a spiral of debt that can take years to pull out of. It can also damage your credit. Here's some information to help you make wise decisions so you don't get into trouble.
take your time
When you're desperate for money, it's easy to make a borrowing decision you'll regret later. Using credit cards to pay off another debt or get cash may be easy, but it can be very costly. Short-term military loans can be a smart solution, but it's worthwhile to take the time to learn how to accurately evaluate all the options and ensure you know what a loan is really costing you.
Always compare interest rates and annual percentage rates (APR) when looking at military personal loans or credit cards. But don't overlook the payment, length of loan and fees. Sometimes a short-term loan will have high rates, but could end up costing less than a long-term loan with lower rates. Be sure to do the math before you decide.
The truth about credit cards
Beyond interest rates, fees, grace periods and balance calculations, you should be aware of the minimum payment amounts and the length of time it takes to pay it back. This issue has caught the attention of elected officials and non-profit associations recently, and for good reason. That's because, as with many things, these credit card “deals” seem too good to be true. And they usually are.
Consider these credit card scenarios, and buyer beware:
- If you had $1,000 of credit card debt at 12% interest and only made the minimum payment of 4% of the balance, it would take you 74 payments—more than six years—to pay off. During that time, you will have paid nearly $300 in interest. But, if you had a fixed rate loan for the same amount, even at 30% interest for 12 months, you would have only paid $169.85 in interest.
- If you had $2,500 of credit card debt at 17% APR and only made the minimum payment, it would take you 119 months (nearly 10 years!) to repay, and would cost nearly $1,300 in interest.
- If you owed $5,000 at 17% interest, you would make payments totaling $7,665 over 145 months (12 years!) if you only made the minimum monthly payment.
THE TRUTH ABOUT PAYDAY LENDing
The passage of the Military Lending Act in 2007 greatly reduced the availability of payday loans to service members and their families. Some lenders continue to offer this quick cash option in military markets with new restrictions. But one of the potential dangers of this type of loan can be automatic “rolling over” or “flipping” due to an inability to repay the loan. This could start families on a financially dangerous cycle of debt. The key question to ask yourself before using such a loan is: If I don’t have $500 today, what are the chances I’ll have the money in two weeks?” If the answer is “slim to none,” it might be best to find another credit option.
THE TRUTH ABOUT MILITARY LOANS
Military loans, unsecured personal loans and other financial options can provide a solid alternative to high interest credit cards, pawn shops, predatory lenders or payday loans. If you are active-duty or retired military with less than perfect or bad credit, a military loan can provide access to the funds you need and may even provide ways to build a more robust credit history.
understand your rights
Before you take out any loan, make sure you read all the disclosures and understand the fees so you are not hit with any surprise costs. There are several laws designed to help you better understand the fees and other costs associated with obtaining credit, such as The Truth in Lending Act and Regulation Z (TILA), the Consumer Credit Act of 1974, the Fair Credit and Charge Card Disclosure Act, the Military Lending Act of 2007, the Servicemembers Civil Relief Act and the Credit Card Accountability Responsibility and Disclosure Act.
You certainly don't need to memorize these laws. What you should remember is that, as a consumer of credit, you have certain rights, such as being informed of the fees, interest rate and APR, monthly payment, term and other details of your loan.
Also, always ask the lender to clarify anything you don't fully understand, and walk away if they don't—it's better for your financial future to avoid a loan you don't comprehend.