Start Saving Now or Risk Paying over 150% A.P.R. Later!
Many people say they do not know how to save or that they do not make enough money to save. This is evident by the fact that half of Americans have less than $1,000 in savings. A lot of these same individuals find themselves in a bind when an unexpected event takes place such as their car breaking down, a major medical expense, a major appliance breaking down, etc. It’s realistic that each of these expenses could cost up to $500 or more. If an unexpected event happens to you and you do not have an Emergency Fund to pay for it, it’s most likely that you will end up using money set aside for your rent, mortgage, or other bills. Using available funds on a credit card or a line of credit are also options. If your credit is bad and you cannot get a loan, then you may get a title loan to get the funds.
A review of unsecured and secured lines of credit from banks and credit unions reveal some competitive rates. One of the lowest Annual Percentage Rates (A.P.R.) offered by a bank is 7.25%. The A.P.R. range offered by one credit union for applicants with bad credit is 14.65% – 17.99%. These are for loans starting at $250 – $500 and remember, you have to qualify for them. Now let’s look at the cost of a $500 title loan for a one month term. The first charge is a $33.00 Lien Filing Fee. Then the title lender charges a fee of $95.89. This fee varies and increases depending on the amount of the loan. Finally, monthly interest is $5.14. Interest varies and increases depending on the amount of the loan. The interest rate on this $500 loan seems reasonable but when you include the lender fee of $95.89, the Finance Charge totals $101.03 for one month. Including the $33.00 Lien Filing Fee, you would end up paying $634.03 for a $500 loan. That’s an A.P.R. of 230.62%! Wow! That’s more than 10 times the 17.99% A.P.R. charged by some credit unions or the 0% A.P.R. you would be charged if you had the money in a savings account.
With the rates charged for a title loan, you would most likely get caught in a cycle where you would have to keep taking out the loan again and again because you could not afford to pay it back without using money set aside for other bills. That means you would be paying $134.03 in fees and interest every month. If you saved $100 a month in a savings account for an Emergency Fund, you would have $500 for emergencies in five months. Or you could save $80 a month (or $40 a paycheck) and have $480 for emergencies in six months. Then you could either pay for the unexpected emergency from your savings account or use the savings account to get a secured loan. Then you would still have the money you saved and possibly build your credit at the same time. The alternative is to possibly pay $134.03 per month on a loan and struggle each month in a vicious cycle of robbing Peter to pay Paul.
It may seem like you cannot afford to save for emergencies, but when an emergency comes up you will realize that you cannot afford not to save. That is, unless you enjoy the possibility of high fees and vicious repayment cycles. I suggest that you take the first choice and make life a little easier for yourself. It might seem hard at first, but you can do it. All the best!
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