A Bad Choice for Holiday Cash

Boy, oh boy, did they have a deal for me. A local lender (who shall remain shameless) offered me a loan to get the “holidays I’ve always wanted.” The offer noted I could get holiday cash for gifts, entertainment, travel—even decorations!

And the payments were so small. For a $1,500 loan, I only had to pay about $60 a month. If I “needed” $2,500, then my payment was only going to be about $94 a month. And the numbers got bigger from there.

Unfortunately, the interest rates associated with these “loans” also got bigger. Take the $1,500 loan: the interest rate works out to about 25%. I hate to say it, but I think I could get a better deal off a credit card charging “only” 19%. The $2,500 loan was more reasonable; the interest rate there was just 21%.

Needless to say, all of these loan offers are bad deals for me (and you). Buried in all the marketing hype of this offer is the insinuation that “money = happiness” during the holiday season. Just buy some stuff now you can’t really afford, or take a trip you can’t pay for now, and you’ll be happy (somehow).

Well, I won’t be a grinch and say the lender is lying (totally). Money does equal happiness for the lender, and the more I borrow the happier it gets. I know I’d be happy if I could earn 20-25% on my money for 3 or 4 years. Who needs a stock market with returns like those?

For that $1,500 loan, I’d repay about $2,160 in total. So I spend almost $700 to borrow $1,500. Hmm. Well, maybe the $2,500 loan is a better deal. I’d repay almost $3,400 there. So I spend about $900 to borrow $2,500. Hmm. That doesn’t sound too great either, especially given the 1% or less my savings earn in the bank.

So my question (to anyone else who gets these “offers”) is, how come I earn 1% and this lender wants to charge me 20% or more? The answer: money = happiness. I pay exorbitant interest rates, and the lender is very happy indeed this holiday season. Those aren’t sleigh bells you hear ringing; it’s your money pouring into the lender’s account.

If and when you get these offers, do yourself a favor: put ‘em right in the round file. (Scratch that: too much chance of identity theft. Shred these offers or burn them in the fireplace.) Go see your regular bank or credit union if you really need to borrow. Your holidays will be a lot cheaper—and brighter.

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About Mike Wilson

Michael L. Wilson, MBA, CFP®, CRC®, is the owner of Integrity Financial Planning. Prior to founding Integrity in 1998, he worked for two years as a faculty member at the College for Financial Planning in Denver, training other financial advisors. Mike has 10 years of experience in the mutual fund industry, having worked with Fidelity Investments and Invesco Mutual Funds. He holds an MBA in Finance from Baylor University. Learn more about his work at www.integrityplanner.com.
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