Keeping the misspending monkey off your back

(11/25/2011) Erate Exclusive - You don't the have time and shouldn't spend the money for bad financial habits -- especially in today's economy where the 99 percent often struggle to make ends meet.

If you don't know what's considered a bad financial habit, you likely are already in trouble, but the National Foundation for Credit Counseling (NFCC) can help you see your mistakes.

Here are some financial behaviors that warrant evaluating. If you suffer the symptoms, it's past time to kick the habit.

• Payday loans - To get a payday loan, you write a post-dated check for the amount of the loan, plus any fees the lender tacks on. You get the cash you need to borrow and promise to pay back that amount plus the fees.

The payday loan term will span one or two weeks, after which the lender cashes your post-dated check. Payday lenders typically charge a fee per every $100 borrowed.

For example, if they charge $15 for every $100 in a payday loan, your post-dated check would amount to $345. For a short term loan, $45 seems reasonable, but it actually amounts to a whopping 390 percent Annual Percentage Rate (APR). Chances are, you would never borrow money at triple-digit interest.

If you can't repay the loan at the end of the term, the addiction really sets in when you have to borrow anew or rollover the loan for more fees.

• Pawn Shops — Pawn shops allow you to borrow money by putting up collateral in exchange for cash, you can sell their merchandise outright, or you can buy merchandise for sale.

The pawn broker will give you substantially less cash than the item is worth, which you'll have to repay with interest. If your repay the loan in full, you get your merchandise back. If not you can renew the loan or forfeit the merchandise. Again, expect to pay interest and fees that amount to an APR in triple-digits.

NFCC says studies show that only 60 percent of pawners end up reclaiming their merchandise, essentially selling an item for cents on the dollar, something they likely otherwise wouldn't do. The bargains go to the buyers, not the pawners.

• Rent-to-Own — You want to perk up your home for the holidays, but a quick trip to the retailer confirms that a new living room set or flat panel HDTV is out of your price range. So you go the rent-to-own route because of those affordable monthly payments.

Again, you are socked with high interest and fees. Here's an example: If you bought a $200 item and agreed to make the seemingly affordable weekly payments of $15 for 78 weeks (basically one and one-half years), you'd end up paying $1,170 at an APR of 388 percent.

NFCC says, chances are, you could have saved the money before buying or used a lay-away plan to purchase the same item at a traditional retailer for a fraction of the overall cost. If seems too good to be true, it is.

"People wonder why anyone would agree to the terms imposed by payday loan companies, pawn shops and rent-to-own businesses. The answer is that consumers who utilize such concerns typically do not qualify for loans from banks or credit unions, and would not be approved for in-store lines of credit," says Gail Cunningham, spokesperson for the NFCC.

"Nonetheless, people need to understand that even though there is always a cost to credit, when that cost becomes unreasonable, the consumer is better off considering other options or doing without. The real answer lies in breaking your addiction to these easy money solutions by probing to understand the root of the problem and resolving it," Cunningham added.

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