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  • 1. MONEY TRAPS! Don’t Get Caught…… LESSON INTRODUCTION: Why do people go to Cash to Go instead of a bank or credit union? (Transparency 1) • You can get money fast • Person is friendly and doesn’t ask questions • Don’t want to tell others you can’t pay your bills • Paying someone an extra $20 to $25 to avoid having your lights and heat turned off may not sound like a lot of money when you can avoid re- connect charges Think about the following cash traps. They can cost you!! Paycheck Loan Tax Refund Loans Car Title Loans Check Cashing Charges and Money Orders Bounced Checks and Late Payment Fees Advanced-Fee Loans by Telephone, Mail, or on the Internet High Interest Credit Cards Sooner or later, almost everyone needs to use credit. Credit lets you buy and use goods and services now with the promise of paying for them in the future. It is important to remember that using credit is not free. Buying “on time” costs you additional finance charges and interest. These costs can add up quickly. The actual dollar cost of using credit is measured with the annual percentage rate (APR). This is the finance charge you will pay in one year stated as a percentage of the unpaid balance. The APR is an excellent way to compare the cost of one loan against another loan. The APR should be written on the loan papers or posted somewhere in the business that is making the loan. If you do not see the APR, ask the person who is making the loan what the APR of the loan is. The money traps examples in this lesson use APR as a way of comparing the total cost of one trap with another, unless the state has a set dollar fee. Since the APR of a loan may vary from one lender to another, it is best to find out exactly what the APR is of any loan before you sign official papers ____________MONEY 2000 plus____________ Purdue Extension Knowledge to Go
  • 2. LESSON PRESENTATION: Definitions for this Lesson (Transparency 2) Sooner or later, almost everyone needs to use credit. Credit lets you buy and use goods and services now with the promise of paying for them in the future. But using credit is not free. Buying “on time” can include both finance charges and interest. These costs can add up quickly. The annual percentage rate (APR) lets you compare the actual dollar costs of borrowing money from different sources and for different amounts of time. APR is stated as what it will cost to borrow a certain amount of money for one year. APR is an excellent way to compare the cost of one loan against another loan. APR should be written on the loan papers or posted somewhere in the business that is making the loan. If you do not see the APR, ask the person who is making the loan what the APR of the loan or card is. The money traps examples in this lesson use APR as a way of comparing the total cost of one trap with another, including fees and finance charges. APR is usually used legally to state interest rates for comparison across credit options. However, because some small loan lenders used fees and finance charges to increase their return for loaning you money, we have converted these fees and charges into APR rates to show how it may be less expensive to use more traditional credit options when you have to borrow money. For some types of loans, APR is set by a state’s usury laws but the fees may make a loan much more expensive than it appears. It is always good to add up all the costs of credit in considering your options and to make saving for goals and emergencies as one of your options. An example, you have a balance of $600.00 on your credit card. The bank can charge you $12.95 per month (25.9% APR) on $600.00 if that amount is not paid by the due date. ____________MONEY 2000 plus____________ Purdue Extension Knowledge to Go
  • 3. Trap 1: Paycheck Loans (Transparency 3) Judy’s story. Judy works at a local factory. Payday is every other Friday. With almost two weeks until her next payday, the electric company is threatening to cut off her power if she doesn’t pay her bill in 24 hours. Her friend says, “Cash to Go” is a good place to get money. Judy wrote a check to Cash to Go for $233 ($200 for the electric bill and $33 for the loan charge) and Cash to Go gave her $200 in cash so she could pay the light bill. Cash to Go cashed Judy’s check on her next payday. Borrowing $200 for less than two weeks with a paycheck loan from Cash to Go cost Judy a loan charge of $33. This is an effective annual interest rate of more than 429%!!!! However, paying an extra $33 to avoid having her lights turned off did not sound like a lot of money to Judy because it was the only way she could avoid having to pay a re-connection charge. What other choices did Judy have? What is a paycheck loan? With a paycheck loan, you are able to borrow money against your future paycheck using a personal check as collateral or security. This type of loan is usually for a very short period of time, often two weeks or less. Indiana law determines the fee charged for a loan made on a personal check to be a minimum of $33.00 (or more based on the amount of the loan). The loan fee charged is very high considering the short time the money is borrowed. Another problem arises if the consumer is unable to repay the loan on payday and extends the loan for another two weeks. The consumer will have to pay $33 for each loan. If the loan is not paid in two weeks, the borrower will have to pay another $33 for each extension of their loan. What is the interest rate Judy would have to pay for a personal loan at a bank? Usually they are less than 20% per year. Call local lenders to determine what the rate is in your area. What is the interest rate on a credit card? The average annual interest rate on credit cards is currently 14% - 18%. Even a very high interest rate credit card might only charge 20% - 42% interest per year. Check a newspaper, financial magazine, or call a bank for the current rate. Even thought both personal loans and some credit cards carry high interest rates, neither of them come close to 429%. Having a credit card to only use in emergencies such as Judy’s case may actually save money over other choices. It is important to repay the money borrowed as soon as possible to avoid more interest charges. Before the next payday, what must Judy do to keep expenses in line? She will have fewer dollars this week because she already spent most of this paycheck for the light bill and loan fee to Cash to Go. ____________MONEY 2000 plus____________ Purdue Extension Knowledge to Go
  • 4. Trap 2: Quick Tax Refund Loans (Transparency 4) David’s Story. David wanted his income tax refund fast to pay to get his car repaired. He paid $50 at the “Get It Now” Tax Preparer to get his $750 income tax refund today. David only received $700; there was a $50 loan fee. While the amount may not seem like much, David is paying a whopping 84% interest rate. What is a Quick or Rapid Tax Refund Loan? A quick tax refund is really a short-term loan that charges a high interest rate. The tax preparer gives you part of your income tax refund on the day you file and you turn over the total amount of your refund to the tax preparer when it is returned by the government. Compare the costs of the quick tax refund. If you only receive $700 of your $750 tax refund, that is a loan fee of $50. This loan for a short period of one month equals a monthly percentage rate of 7% or an annual percentage rate of 84%. David would be better off to use a credit card that charges 21% annual percentage rate to pay for his car repairs. The interest for one month would be $12.25, not $50. In Indiana, the minimum fee to be charged on this type of loan is $33.00 (or more based on the amount of the loan). $12.25 or $50??? You Decide the Best Deal If David uses a cash advance on his credit card to pay for the car repairs, he will have to start paying interest immediately and will probably have to pay a cash advance fee of 2%. Even so the total cost to him would be only $14 more. Next time, what can David do to keep more of his refund – and still get his refund in a few weeks? Start saving for an emergency fund to pay for unexpected expenses. Find a Volunteer Income Tax Assistance (VITA) site where taxes will be completed at no charge. Under certain conditions, taxes can be filed over the telephone. Hire a tax preparer who files returns electronically. A refund is normally in the mail within two to three weeks. If the refund is deposited electronically into a checking account the time will be even faster. Before going to have taxes done, gather all information the tax preparer needs including W-2 forms, children’s Social Security numbers, and 1099 forms to prepare taxes so there won’t be delays. ____________MONEY 2000 plus____________ Purdue Extension Knowledge to Go
  • 5. Trap 3: Car Title Loans (Transparency 5) Henry’s Story. Henry’s telephone rings each evening. His creditors are calling and asking him when he plans to make payments on his loans. Henry explains he will pay them with his income tax refund. But one firm says they will come and get his furniture if he doesn’t make a payment now. Since one of his cars is paid for, Henry went to “Tommy’s Title Loan Company”. The title loan company let Henry borrow $700 for 30 days using the title to his car as collateral. If he pays back the loan in 30 days, Henry will owe Tommy $875. Henry knows his tax refund check is due any day. Is the car title loan Henry’s best option? What is a Car Title Loan? In exchange for giving up your car title and essential personal information, the car title loan company usually lends you up to one-third (1/3) the wholesale value of your automobile. If you do not pay the loan on time, the lender will take your automobile and sell it. To borrow $700, Henry gives Tommy his clear Indiana car title, a copy of his driver’s license, the car registration, a copy of his latest paycheck stub, a piece of mail showing his address, and a set of car keys. What are the advantages of Car Title Loans? There is no credit check. No financial questions are asked. Henry gets to keep driving his car until the loan is due. He doesn’t have to wait to get the money. What are the disadvantages of Car Title Loans? The loan charges are high. Interest charges vary greatly, but are usually very high. Since Tommy has the car title, a set of the car keys, and knows where the person lives and works, it’s easy to repossess the car. If a lender repossesses your car and sells it, the lender can keep the total amount. So if your car is worth $4,000 and you only owe $700, the lender keeps $3,300 in profit! Are car title loan companies regulated? If a company is loaning out more than 25 loans or 5 second mortgages a year, they are required to have a loan license issued by the Department of Financial Institution. They are required to follow the same fee and interest guidelines as other financial institutions who handle short-term loans. If you do not see a sign listing the interest rate charged, ask what the annual percentage rate of the car title loan is. What advice would you give Henry about using a Car Title Loan? It can be very expensive and risky to use a Car Title Loan to borrow money. Other ways of borrowing money should be used if at all possible. Always compare the APR of loans to determine the least expensive choice. Maybe it is time to look for assistance in financial planning to get control of your bills. ____________MONEY 2000 plus____________ Purdue Extension Knowledge to Go
  • 6. Trap 4: Check Cashing and Money Orders Costs Add Up (Transparency 6) Juan and Maria’s Story. Every week Juan and Maria pay $5 each to cash their paychecks at the local store. Then every month they pay $4 to buy four money orders to pay out-of-town bills. Juan’s friend, Joe said, “Why don’t you open a checking account? You can cash your check for free and put part of the money in your account to cover the bills you have to mail out of town. With the few checks you write each month, it only costs between $6 and $7 a month. As long as you keep track of your balance and do not bounce any checks, you can save money over what you are paying now.” How much are Juan and Maria paying to cash their checks and buy money orders? o To cash weekly paychecks at $10 a week equals $520 per year. o To buy four money orders each month at $1 each equals $48 per year. o To cash paychecks and buy money orders they are paying $568 each year. How much would a thrifty or economy plan checking account cost? • At many banks, the monthly charge is $5 plus $.25 for each check you write. You will also have to buy checks. The total cost for Juan and Maria would be about $110 a year. • What are the charges at a bank in your area for a thrifty checking account? • What are the charges in your community to buy a money order? Are there other advantages to having a checking account? Having a checking account will prove to a lender you can manage an account and your money. If you should need to borrow money, this history could help you get a loan. In Indiana a licensee may not charge check cashing fees in excess of the greater of $5.00 or 10% of the face amount of the check. ____________MONEY 2000 plus____________ Purdue Extension Knowledge to Go
  • 7. Trap 5: Money Management Mistakes – Bounced Checks and Late Payments (Transparency 7) Linda and Karl’s story. Linda wrote checks for her bills the night before payday. The next day, she picked up her paycheck and mailed her bills. Then she ran into some friends and by the time she made it to the bank to deposit her paycheck, the doors were closed. Three of the checks bounced. It cost her $60 ($20 for each check). Karl left his credit card bill and phone bill under a pile of papers, got busy, and forgot to write and mail the checks. Next month, $15 in late charges were added to each bill and there were interest charges on his credit card bill because he carried over a balance. What happens if you bounce a check at your bank? • What does the bank charge? (In Indiana a fee of $20.00 if permitted on in-state banks) • What does the merchant charge? (In Indiana a fee of $20.00 if permitted on in-state banks) • If you do not know, how could you find out this information? (Ask the bank and merchant what the charges are or look for signs at the checkout counter). • What happens if you do not pay the amount owed and the additional charges? (Ask the bank or merchant as to their policy) What happens if your payment is late? • What are the charges on the accounts you have? (In Indiana, the maximum in-state banks or credit lenders can charge on late payments is $15.50) • How do you find out this information? Credit Cards – Read the rules (disclosure statement on credit card agreement) Utility Bills – Call the company billing office Car Payment – Ask your lender or read the rules on your loan agreement Other Credit – Read the disclosure statement or ask your lender If your telephone or electricity is disconnected, some companies may require that the consumer pay the unpaid balance, re-connect charges, and a cash deposit against future bills. What can you do to help keep from bouncing checks? Learn your bank’s check-clearing practices. They should be two business days for a local check and 7-10 days for all others. Note the time you have to make a deposit to have it credited to your account that same day. Overdraft protection is good, but some banks charge $15 or more a year to have this protection. Others will provide a minimum line of credit of $300, but if you’re just a few dollars overdrawn they will make you borrow the whole $300 and charge you interest. If a check bounces, ask the bank to waive the fee. If your bank charges high fees, shop around and move your account to a bank with lower fees. In Indiana fees for returned checks cannot exceed $20, if it is an in-state bank – delinquency fees cannot exceed $15.50 when a payment is made more than 10 days late on in-state banks and lenders . Out-of-state banks can export their State’s delinquency charges and NSF fees and may be higher than Indiana’s.
  • 8. Trap 6: Advanced-Fee Loans – Borrowing Money over the Telephone, Internet, or through the Mail (Transparency 8) Anna’s Story. Anna was desperate. She couldn’t pay her bills and did not want to tell her parents. They would not approve and they would tell her family and the relatives. She was called one evening by a company offering her a “loan with no questions asked, but she had to pay $100 to get the loan”. She said she would think about it and return their call if interested. The next day she saw an ad in the newspaper for the same company that said “Loans by Phone – No Questions Asked”. They said they would guarantee you a loan for only $100. The ad told readers to call a 900 telephone number to find out where to send the money. This number is the same one Anna was given the night before to respond to. What would you advise Anna to do? Don’t borrow money if you have to pay fees up front. Legitimate lenders do not lend money without asking questions and checking your credit and do not guarantee you will get a loan. Don’t borrow money if you don’t know the lender. You are sending money to someone whom you have not talked to, let alone met. Don’t borrow money unless you see the terms in writing. If you don’t understand the terms ask questions. Don’t give personal information over the phone like your Social Security number. Find out how much the 900 telephone call will cost you. It could be $5 or more per minute. What other scams take place over the phone, internet or through the mail? Debt Consolidation Companies that charge $400 - $500 up-front fees for the loan. Instead seek advice from the Consumer Credit Counseling Service (1-800-388- 2227). Fix your credit report offers. No one can remove negative information from your credit report if the information is true and current. You can, on your own and at no cost, get inaccurate, negative information removed from your credit report. You also can try to get accurate, but outdated negative information removed. You have won a prize offers. A true prize is free. You should not pay any money or purchase anything to enter a sweepstakes or contest to win a prize. We can get your money back! These so called “recovery rooms” are just a way to take advantages of you a second time if you have already lost money in a telemarketing scam. Do not pay more money to get back money you have lost. REMEMBER! It can be very difficult to tell if a telemarketing call is legitimate. This is especially true if the caller is pressuring you to make an on-the-spot decision and to send money right away. While many callers can make their offers sound awfully good, even too good to pass up, you should not be afraid to take time to make up your mind, or to call the Indiana Attorney General or National Fraud Information Center (1-800-876-7060) to check out the company and to get advice. ____________MONEY 2000 plus____________ Purdue Extension Knowledge to Go
  • 9. Trap 7: High Interest Credit Cards (Transparency 9) Mary’s story. Mary has a credit card. She charged $100 to buy school clothes for Alan and Andy. She charged $150 for new tires, another $100 for groceries when she was out of cash, and $300 for car repair. She now owes $650. Her minimum monthly payment is $13. Her credit card carries an APR of 18%. How long will it take Mary to pay off the balance she owes if she make only minimum payments and doesn’t use her credit card again until the balance is paid? 7 year and 9 months or almost 8 years How many dollars in interest will she pay? $560 What will be the total Mary will pay for her purchases? $560 (interest) + $650 (balance) = $1,210 Financing a lifestyle you can not afford with credit cards is a trap. However, sometimes you must use credit. Pay those bills as quickly as possible to reduce interest charges. LESSON SUMMARY: What are other money traps in your community? Think About the Money Traps – They Cost You!!! (Transparency 10) Stop! Think before you get caught in a money trap. Look at the total cost of any financial decision. Try to avoid high cost borrowing. Is there a better, less costly way to handle the emergency situation? Would it be less expensive for you to have a checking account or are there other ways to handle your finances that would cost you less money in the long run? Will you have the money to pay a loan back on time? Say no to borrowing over the telephone, internet, or through the mail! Can you qualify for a low interest rate credit card or personal loan instead of getting caught in one of these money traps? Plan ahead. Establish an emergency fund. Give participants copies of “STOP and THINK BEFORE YOU SIGN!” Handout ____________MONEY 2000 plus____________ Purdue Extension Knowledge to Go
  • 10. Bright Ideas for the Future (Transparency 11) Idea 1 – To motivate you and help you keep from overspending, think about what might happen the next time you have a financial emergency. Before you spend money on something that is not a necessity, or borrow money, ask yourself --- • Will I have enough money or stamps for food? • How much will this loan cost me? • How will I pay back the money I borrow? • Will my lights and heat stay on or be shut off? • How will I deal with sickness or other emergencies? • Will poor credit keep me from getting a job? What else might happen? • Allow yourself a small amount of MAD MONEY each month ( money you can use to treat yourself with one small splurge each month). This may help you keep the rest of your spending under control since you will not feel that you are giving up everything you want to have. Idea 2 – Where can you find more money? Look at your monthly budget. Can you change your spending on…..? Cable television – go to basic cable only Long distance phone calls – use a timer or a cheaper company or write letters Drop telephone features such as call waiting, caller ID, unlisted numbers Thermostat settings – lower your heat temp.; raise your cooling temperature Share rides or bargains What do you suggest? Give participants copies of “Ways to Save Money”. Idea 3 – How can you save some money ahead for the next emergency? Here are some possible suggestions. • Save all your loose change in a jar • Hide some money. Trick yourself by using two wallets. Use the money in one wallet when you shop. Save the money in the other wallet for emergencies. • Have a special hiding place to put money to use late in the week or month between paychecks. • When you get a raise, save part of it. • Get a second job or have other family members work and contribute to household expenses. • What else can you do? Idea 4 – Break a habit Eat out less and cook at home Take soft drinks and snacks to work instead of buying out of the vending machines Discontinue magazine subscriptions and go to the library Reduce or stop smoking, drinking alcohol, soda, etc. Have participants complete an evaluation form. Edited and adapted from “Money Traps that Keep you Broke!”, Clemson Extension Money 2000 Financial Management for the Not-Yet-Wealthy and 66 Ways to Save Money, Consumer Literacy Consortium. Indiana references from the Division of Financial Institutions, Indiana State Government. ____________MONEY 2000 plus____________ Purdue Extension Knowledge to Go
  • 11. Program Evaluation Form Please answer the following questions about this lesson. Your answers will help us to do a better job of preparing materials for you. Do not put your name on this evaluation. For questions 1 and 2, put an X in the blank that best represents your answer. 1. In this program, I learned: _________ a lot of information _________ some information _________ nothing 2. This program was: _________ very helpful _________ somewhat helpful _________ not helpful 3. What are two things that you plan to do to avoid getting caught in a money trap? (1) (2) Handout – 1 Money Traps ____________MONEY 2000 plus____________ Purdue Extension Knowledge to Go
  • 12. STOP AND THINK BEFORE YOU SIGN! To avoid money traps and make financial decisions that will cost you a lot of money in the long run, answer these questions: 1. Is the item I am going to spend money on something I really must have right now? 2. Can I hold off the purchase until I save enough to pay cash or at least make a down payment on an installment plan? 3. Does a reputable retail store offer a layaway plan for the item? 4. Have I thought of all my choices, including applying for retail credit from the store or borrowing money from a credit union, bank, or small loan company? 5. Would a used item from a garage sale, classified ad, or secondhand store work as well? 6. What is the total cost of the loan? The total cost can be found by multiplying the payment amount by the number of payments. Make sure to add in any other charges. 7. What happens if you are late with a pyment on your loan? Will the item be repossessed? Always shop around for the best deal. Contact your local Better Business Bureau or the Indiana Consumer Protection Division of the Attorney General’s Office (1-800-382-5516, option 2) to see if there are any complaints from other consumers about a business before you make a deal with them. Before signing a loan agreement, read the entire form before signing your name. Make sure you understand everything it says. If you do not understand something, ask questions. Make sure everything that you have agreed to is written on the form and that there are no blank spaces. Know the total amount that you are paying. Ask what the annual percentage rate of interest (finance charge) is in any installment. Handout – 2 Money Traps ____________MONEY 2000 plus____________ Purdue Extension Knowledge to Go
  • 13. MONEY TRAPS! Don’t Get Caught….. Presentation on Small Loans Costs Includes Options for Lower and Avoiding Some Costs Dorothy Keeton CFS Educator Jefferson County Alma J. Owen Extension Specialist Consumer Sciences and Retailing February, 2001 ____________MONEY 2000 plus____________ Purdue Extension Knowledge to Go