Avoid Check-Cashing Stores, Payday Lenders, Pawnshops, and Rent-To-Own
Too often, when you approach the entrance to a military base, you pass through a gauntlet of pawnshops, fast-food restaurants, payday-loan businesses, and liquor stores. Many of these businesses are bad for your financial health; others are bad for your physical health.
You can’t shut your eyes to these businesses – but you certainly don’t have to give them your money. In this section, we’ll look at some of the most common money drains and suggest ways to avoid them. We’ll also look at ways you can climb out of debt – just in case you fall into a money drain.
When you move, you may find that it’s too costly to move all of your appliances. For example, if a TV already is on its last legs and you’re at your weight limit, you may choose to give it to a charity rather than pay to have it shipped.
After you move, you may be tempted to rent a new TV from a rent-to-own store. With a rent-to-own store, you agree to pay a weekly rental fee and, in time, you’ll own the TV or appliance. But this is an expensive way to buy an item.
Let’s say you see the TV you want at a department store and it costs $400, but you don’t have that much cash. Instead, you agree to a rent-to-own plan for the same TV. For $15.95 a week, you’ll have the TV you want, and in 78 weeks, you’ll own the TV. Here’s what your $400 TV could cost you:
Weekly Rental $15.95 x 78 weeks= $1,244.10
5% Sales Tax 80¢ x 78 weeks= $62.40
Delivery Fee$10.00 (once)= $10.00
Total Cost of rent-to-own TV $1,316.50
Your $400 TV could cost your family $1,316.50! A better option would be to buy a used TV or save your money until you have the $400.
Check-Cashing Stores and Payday Loans
Off-base check-cashing stores cash checks for a fee. In general, the fee is around $4 for each $100. This may not sound like much, but most military families can’t afford to waste a single dollar. A bank or credit union account with low fees is a better option. If you haven’t had time to open a bank account and need to cash a small, personal check, see if your base has a military exchange that will cash your check for free.
Many off-base check-cashing stores also make “payday loans” to military personnel and other individuals who work full time. Let’s say you need $100 and go to a payday lender. Here’s how your loan works:
- You show the store whatever proof they need that you can cover the check – pay stubs or other paperwork.
- The store asks you to write them a check for about $120. The store agrees not to cash your check for about a week or two.
- You get back $100 in cash. The store keeps the extra $20 as the fee for the loan. (Most stores charge between $15 and $30 for a payday loan.)
- The store cashes your check on the agreed-upon date.
But, after the time period is up, what happens if you don’t have the money in your checking account to cover the check you wrote? For a fee, you can extend the loan. In fact, this cycle usually can keep going and going-as long as you pay the fees.
In time, you could end up paying anywhere from 450 percent to 650 percent in fees and interest charges. Why so much? Because many states have no rules limiting the amount of fees these stores can charge.
You have better options than using payday lenders. For starters, many bases offer financial counseling services. People in these offices have helped many young military families. Another option may be a short-term loan from a credit union or bank. It may be difficult to talk to others about your financial problems, but services are available to help you-and they cost much less than payday lenders.
Pawnshops and Title Loans
Some people use pawnshops as a way of getting a quick loan. But the amount of money you’ll get for your possession usually is only a small fraction of the item’s value.
Many pawnshops also make loans based on car titles. These loans are risky and you could lose your car. For example, say you have a car worth $5,000 and you decide to get a title loan from a pawnshop. A pawnshop is likely to loan you about $1,000-in exchange for the car title. In this example, let’s say you agree to pay the loan back in six months. The pawnshop will charge you about 10 percent per month on the loan.
This is what your $1,000 loan could cost you:
Loan amount $1,000(pawnshop keeps the title to the car, worth $5,000)Interest charged $600(10 percent a month for six months)
Total cost $1,600
As you can see, $600 is a lot of interest to pay on a $1,000 loan for six months. But if you fall behind in your payments, you’ll face even more charges.
The pawnshop could have your car repossessed-and charge you a fee for the repossession. Also, if your car is stored on a lot, you’ll be charged a storage fee. If you fail to pay all of these fees, the pawnshop has the right to sell your car. This is a high price to pay for a loan. Consider other options.
Digging Out of Debt
It’s easy to fall into debt-especially if you are in the junior ranks in the military and are supporting a growing family. What can you do if you know you’re carrying around too much debt? First, don’t feel overwhelmed. Debt can be managed. Start by taking at least some of the following steps:
- If you think you can’t make a payment on a debt, call the business you owe money to and ask for more time. If you make the call before you miss a payment, the business often will be more willing to work with you.
- Talk with the financial counseling personnel on your base or post. They can offer suggestions to get out of debt and let you know about helpful programs specifically for military personnel and their families.
- Consider working with a non-profit debt counseling service, such as Consumer Credit Counseling Service (CCCS). For a small fee (or maybe no fee), CCCS can help you set up a repayment plan. To find a CCCS location near you, call 1-800-388-2227.
- Organize your debts in order from the highest interest charged to the lowest. Make at least the minimum payment due on all the debts, but put any extra money toward the debt with the highest interest rate. When that debt is paid off, move that payment onto the next debt with the highest interest rate. When that debt is paid off, move that payment onto the next debt with the highest interest rate. In time, you will pay off your debts and save big bucks in interest.
- Limit yourself to one major credit card and only use it for emergencies.
- Consider bankruptcy only as a last resort. Bankruptcy will stay on your credit history for many years-seven or 10. This will make getting new credit very difficult. It’s better to try to work out a repayment plan with creditors. If you feel you have no other choice than to declare bankruptcy, first talk with a lawyer, the financial counseling personnel on your base or post, or a legal aid clinic.
By The National Military Family Association in partnership with the National Endowment for Financial Education