Loans and Credit Cards – What You Need to Know

When I worked at a bank, I’d sometimes quip with my coworkers that I would rather borrow money from the mob than from a bank. Why? At least with the mob you’ll know what you are getting into.

For five out of the ten years with the bank, I collected from or sued “bad customers” who paid late on their loans (or not at all). But, many of those customers weren’t deadbeats; they were simply caught up in the many traps and pitfalls of borrowing money. So here are three things you should fully understand before you use that credit card or sign for that loan.

1 – Simple Interest: Sounds nice doesn’t it? All you need to do is figure out your current principle balance (or average daily balance if it’s a credit card or line of credit), multiply that by your current interest rate in decimal form, divide that number by 365 (or 360, depending on what calculation your lender uses) to figure out your per diem (the interest you pay daily on your balance), and then multiply that figure by the number of days since your last payment was posted to your loan. This will give you the amount of interest deducted from your next payment (assuming that you make that next payment on the exact day you’ve made your calculations)… Simple right?

Well, yes and no. It’s simple for computers to calculate and keep track of; it’s also simple for people to forget. The bottom line is this: In a simple interest loan, you pay interest every day that you have a balance. So, if you make payments a few days late here and there, not only are you likely to have late fees charged to your account, you are giving the bank free money.

2 – “Hidden” Fees and Interest: Many lenders don’t include outstanding late fees on your billing statements. They’re still there, but you’ll need to call your lender to ask how much they are. One time a customer called me to get his car loan’s payoff. The regular payment was about $340. The final amount he needed to pay off his loan was over $800. Why? Accumulated late fees.

And did you know that in most loan contracts (that booklet or piece of paper awash with tiny print and mind numbing jargon) lenders reserve the right to increase your interest rate if you pay late on a separate loan? Yep. Basically, this means that paying late on one credit card can raise the interest rate on all your others.

3 – Deferrals, Extensions and Skip Payments: With installment loans, some lenders will invite you to skip one of your payments. Others will offer you that option if you’ve come on hard times and can’t pay your monthly amount due. This can be a nice option to have.

Maybe it’s Christmas time and you want to spend a little extra on the kids, or spouse, or even yourself. But, just because you’ve skipped or deferred that payment it doesn’t go away. Your lender has simply added that payment on to the end of your loan: if you originally had a 24 month loan, you now have a 25 month loan. Remember that the longer you have a balance the more money you are paying the bank.

These are the three most misunderstood concepts I came across while I worked at the bank. They can get you into a lot of trouble. But, if you understand them, you’ll at least have a better idea of what you are getting into when you borrow money – and that might save you some in the end.

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