This story is provided and presented by our sponsor Pioneer Services, the military division of MidCountry Bank, which has provided financial services to the men and women of the Armed Forces for nearly 30 years. For more information, visit PioneerServices.com.
Everyone needs to borrow money now and then to pay bills or to cover unplanned expenses. But how you get that money—and how quickly you pay it back—can be the difference between making ends meet and making a mistake. If you don't have experience managing your bills, you and your family can get stuck in a spiral of debt that can take years to pull out of. It can also damage your credit. Here's some information to help you make wise decisions so you don't get into trouble.
TAKE YOUR TIME
When you're desperate for money, it's easy to make a borrowing decision you'll regret later. Using credit cards to pay off another debt or get cash may be easy, but it can be very costly. More traditional installment loans can be a smart solution, but it's worthwhile to take the time to learn how to accurately evaluate all the options and ensure you know what a loan is really costing you.
Always compare interest rates and annual percentage rates (APR) when looking at personal loans or credit cards. But don't overlook the payment, length of loan and fees. Sometimes a short-term loan will have high rates, but could end up costing less than a long-term loan with lower rates. Be sure to do the math before you decide.
THE TRUTH ABOUT CREDIT CARDS
Beyond interest rates, fees, grace periods and balance calculations, you should be aware of the minimum payment amounts and the length of time it takes to pay it back. This issue has caught the attention of policymakers and consumer advocates recently, and for good reason. That's because, as with many things, these credit card "deals" seem too good to be true. And sometimes they are.
Consider these credit card scenarios, and buyer beware:
- If you had $1,000 of credit card debt at 12% interest and only made the minimum payment of 4% of the balance, it would take you 74 payments—more than six years—to pay off. During that time, you will have paid nearly $300 in interest. But, if you had a fixed rate loan for the same amount, even at 30% interest for 12 months, you would have only paid $169.85 in interest.
- If you had $2,500 of credit card debt at 17% APR and only made the minimum payment, it would take you 119 months (nearly 10 years!) to repay, and would cost nearly $1,300 in interest.
- If you owed $5,000 at 17% interest, you would make payments totaling $7,665 over 145 months (12 years!) if you only made the minimum monthly payment.
THE TRUTH ABOUT PAYDAY LENDING
The passage of the Military Lending Act in 2007 and a recent update in 2015 put new protections in place against these types of loans, significantly reducing their availability to service members and their families. Some continued to offer this quick cash option in military markets by working around the restrictions, but the most recent updates to the law enacted by the Department of Defense should curtail those that aren’t in the best interest of military consumers.
THE TRUTH ABOUT PERSONAL LOANS
More traditional, unsecured personal loans and other financial options can provide a solid alternative to high interest credit cards, pawn shops, predatory lenders or payday loans. If you are active-duty or retired military with less than perfect or bad credit, a personal loan with fixed rates and terms can provide access to the funds you need and may even provide ways to build a more robust credit history.
UNDERSTAND YOUR RIGHTS
Before you take out any loan, make sure you read all the disclosures and understand the fees so you are not hit with any surprise costs. There are several laws designed to help you better understand the fees and other costs associated with obtaining credit, such as The Truth in Lending Act and Regulation Z (TILA), the Consumer Credit Act of 1974, the Fair Credit and Charge Card Disclosure Act, the Military Lending Act of 2007 and the one from 2015, the Servicemembers Civil Relief Act, and the Credit Card Accountability Responsibility and Disclosure Act.
You certainly don't need to memorize these laws. What you should remember is that, as a consumer of credit, you have certain rights, such as being informed of the fees, interest rate and APR, Military APR, monthly payment, term and other details of your loan.
Also, always ask the lender to clarify anything you don't fully understand, and walk away if they don't—it's better for your financial future to avoid a loan you don't comprehend.
©2015 Pioneer Services. No U.S. military endorsement is implied.
