Welcome back to the series FitnanceIQ family. Last week we were able to discuss identifying personal financial crisis, hopefully, you were able to read it. Have you experienced any of those personal financial crises? How did it make you feel? Have you tried any of the suggestions I mentioned before? Have you made any changes so far? I know! I know, it has only been a week or so ago, but the first step in dealing with it is by acknowledging it and figuring out how to change it. Now, this week I will discuss money traps!
What are Money traps you ask? Well, these are certain things that make you lose out on money or help you get into more debt; whether you think it’s good debt or bad (most likely they are bad debt). These money traps will actually put you in further financial distress. Especially cause these are situations that most of us were never really taught in school or by our parents because perhaps we witness our parents using them to get by as well or we thought we were in desperate need to get “fast money or things”.
Now I want to be clear! I myself have fallen into some of these money traps or witness it happen. Also sadly I worked at one before and with the personal finance background I can tell you this, it was literally killing my soul doing the exact opposite that I am passionate about. I spent a year and so listening to people trying EVERYTHING to be approved for a short-term loan where they would have to pay back 3 times the amount back if they stretched it for 5 months. Mind you it was an American company and had different regulations than Canada, but it was hard.
So the money traps that most of us are familiar with are:
- Payday loans
- Rent-to-own
- No-money-down plans or 0% Interest
- High-interest credit cards
Payday loans
The rundown
The most popular ones are MoneyMart, Cash Money and Cash 4 U. If you have walked around Toronto you would have bumped into one at least every 15 mins or so. They are pretty much on every other corner, especially in the under-developed neighbourhoods. Many people call them “loan sharks” and dislike the main goal of them.
So why do people use them so much?
Well, to be honest, life happens. You get the unexpected financial emergency (car breaks down or major injury that OHIP does not cover) that your emergency fund account cannot cover. So what do you do? You head to the nearest Payday loan store or apply online and get a short-term or long-term loan that you can pay back as quickly or slowly as possible.
The catch
I will go based on the MoneyMart which is found on their website (Reference below). So they have a range of loaning you from $120 to $1500, not bad right? Well let’s go to the charge, they have a charge of $18 per 100, so if you were to borrow 300 you would have to pay them back 354 (300*.18 = $54 plus the loan of 300). To some of us that’s not bad (that’s basically HST), however, the Annual Percentage Rate (APR) is 469.29%. Whoa, whoa, whoa…say that again…469.29% APR!!! What does that mean? So if you were to borrow $300 for 14 days, in one year you would be paying back about 1407.
That’s a lot! Let’s not forgot, whatever money you borrow it comes right out your paycheck and in my mind, you are basically behind again. This is a way you keep going back to them and there you have it you have joined the rat race of trying to catch up! Also if you become default you are charged an extra $40. So be careful.
My advice: Try to ask a family or friend! I know we have our pride and all, but I don’t want you to be struggling and making your credit score worse.
Rent-to-own
The rundown
Ever noticed a store called Easyhome? Well if you have not it’s a Rent to Own store. It’s a place where you can put little or no payment down and receive an item that is not yours completely until you have finished paying it off. It could be new or used items.
So why do people use this?
Well, this is ideal for those individuals that need furniture and/or appliances but not able to pay it all at once. So one most important things we need are mattresses, right? Okay, you for a queen size mattress that’s on sale right now.
The catch
Well based on Easyhome’s website (Reference below). You have the option of paying weekly, bi-weekly, semi-monthly and monthly. If you take a look at the chart I provided it’s best to make it monthly. Their APR is 29.9%, better than payday loans.
| Payment Frequency | Rate* | Total fee |
| Weekly/104 payments | 19 | 1976 |
| Bi-weekly/52 payments | 38 | 1976 |
| Semi-monthly/48 payments | 41.14 | 1974.72 |
| Monthly/ 24 payments | 82.27 | 1974.48 |
*Plus applicable taxes and Liability Waiver and Product Performance Provision
So if there any issue? Well just make sure you read the fine print on this because they do have additional cost for coverage. Also, umm it takes 2 years to be able to own this item. When you could have just waited for a little and get a mattress at Leon’s for at least $500. But don’t think Leon’s is off the hook though they are famous for 0% interest plans.
My Advice: Weight it out a bit longer, save up and just purchase it all at once, especially if it is furniture.
No-money-down or 0% Interest plans
The rundown
So numerous of stores have this option for customers they like to promote no-money-down or 0% interest plans. This is a way to linger customers in, whether you are getting a phone, furniture or even a vehicle.
So why do people use this?
Well, it’s for individuals that are strapped for cash at the moment and want to be able to pay for it later than having to pay upfront. This is quite similar to the rent to own arrangement.
The catch
So I’m infamous for this one, just the other day I was trying to buy a phone and did not want to put any money on it. But I was mistaken on how it works, so Freedom/Wind mobile was offering a $0 for a phone I really wanted. I would have to add additional $15 or 20 to my original plan. So instead of the $40, I would be paying $55-60 a month. Ugh, I automatically changed my mind and decide to weight out with my miserable phone and pay my regular phone plan. Basically, this is a way to have companies locking you into a contract, normally 2-years or longer. Requiring with the 0% interest, for a short period (let’s say 3-6months) of time there will be no interest and once that time passes the interest skyrockets. BEWARE!
My advice: Depending on the item, weight it out. Phone or furniture, you can wait a bit longer. A Vehicle, try to put some money on that to lower the cost at least.
High-interest credit cards
The rundown
Oh, the credit card can be a blessing or thee ultimate destroyer. You can sign up for one ANYWHERE, when you go to the mall, the supermarket, go online, and even at the college/university fairs. There are so many types of credit cards as well, but the one you want to beware of are the high-interest ones!
So why do people use them?
Sadly if this is your first credit card, most likely your only option is getting a high interest one (18% or more). Unless you do your research and have decent credit score before even getting a credit card (quite rare).
The catch
Well if you are not aware of how most of the credit cards issuers are, they give you a limit of $300 or more, than provide a monthly bill for you. So the monthly bill shows how much of a limit you have left, how much you purchase throughout the month and the interest you have to pay back if you have an outstanding balance. Mind you they suggest a minimum monthly payment of about 3% of the balance if you were to follow that method; it would take you YEARS to pay it off.
My advice: Make sure if you use the card, pay more than the minimum. NEVER PAY ONLY THE MINIMUM BALANCE. Think this way, can I repay for this purchase within the month, if not. Don’t bother using it. Once your credit score has gone up, try to switch your credit card to one that’s more beneficial.
Sidenote: That reminds me I have to make a phone call to my credit card company!!!
Now I know this is a lot of information and this is only a portion of things that get you started in the money trap! And the advice may sound easier said than done. But if you’re able to identify them and try to stay clear of them you will win this race. And now you know more about them to can do thoroughly research about them, especially payday loans and credit cards. If you have any questions please feel free to ask me. Remember this month is about educating each other, becoming, LEADERS and being financially fit. Much love to you guys
Reference
https://www.moneymart.ca/disclosure-ontario
https://www.easyhome.ca/furniture/bedroom/mattresses/queen/mattress_queen_best_fbserc16a_p09qsu