What are the 2 most evil debts of all? Nope, not credit cards.....can you guess what they are?
The answer: Payday loans and "Buy now, pay later" offers!
First, payday loans. Recently, most provinces have enacted laws limiting the interest these businesses can charge to around 21% to 25% (gee, only?), but in New Brunswick they have yet to do this, so it’s legal for them to charge up to 60% interest in that province! My advice is to avoid these places like the plague. And stop to think, if you’re spending your pay before you even get it, it’s time to make some drastic changes to your lifestyle, not the time to rack up some crazy 25% debt. Dude! That’s a quarter of what you’ve borrowed!
Besides their ridiculous interest rates, these loans have more sneakiness up their sleeves. Generally, they are issued as 30-day loans where the interest is due when the loan matures, but there is usually an administration fee charged up front for taking out the loan (usually around 10% or so). So, you go in and borrow $100. You pay $10 to take out the loan. No payments are due until the 30 days are up, but at the 30 day mark, the entire balance is owing ($100 plus 25% interest) UNLESS you pay another administration fee to start another 30 day clock ticking. Most people take this option, which costs just $10.
The end result is usually that you end up paying many times over the amount you borrowed in fees, to avoid paying the balance you owe (which is growing each month), but you never actually pay any of the original balance off. In other words, six months later, you’ve paid $60 in admin fees (60% of the amount you borrowed, by the way), but you still owe the entire $100, plus six months worth of compounded interest!
And topping my list of sneakiest and most evil debts is the "buy now, pay later” offer. What most people don’t realize about these offers is how they calculate interest. Let’s create an example where you buy living room furniture for $3,000 on a “don’t pay for 18 months” offer. The offer advertises “no payments and no interest for 18 months”. They’re not lying, you don’t owe them any money until after 18 months and technically, they don’t charge interest for those 18 months, but here’s the sneaky part; if you don’t pay the entire balance on that 18 month due date, they charge interest retroactively, right back from the date you originally purchased the item (18 months ago, remember?), usually at a rate of about 36% or so!
In other words, when they say “no interest for 18 months”, what they mean is you don’t have to pay that interest IF you pay up by the due date, if not, then you DO have to pay all the interest that was calculated over those 18 months and into the future until you pay the remaining balance.
So the only effective way to buy something on a “buy now, pay later” offer is to figure out what the monthly payments would be on the item (taking our example above, that would be monthly payments of $166.67), put that money aside each month for the 18 month period, and then pay the entire balance owing on the exact due date to avoid any interest being added to the price. However, if you’re disciplined enough to do that, why not just put the money aside every month and go get the furniture once you have the money in the bank?