Charging Responsibly

When it comes to things that totally stress-out average consumers and make them dread walking into an office for an appointment, the experience of dealing with a car or truck salesperson ranks right up there at the top. Give many people a choice between going to haggle over a new car or going to the dentist for a major root canal treatment, and a lot of them will choose the dentist chair over the customer hot seat at a car dealership. Buying from these seasoned sales pros subjects you to a whole toolkit of sneaky car dealership tricks, and one of the big ones they like to deploy is the so-called “four square” sheet.

As its name implies, the four square is a sheet of paper divided into four sections or squares. The salesperson puts it in front of them while they discuss your pricing options and you try to get the best sticker price or the most affordable auto loan. Here’s how it works:

One square is devoted to your trade-in, if you have a used vehicle to trade to the dealer. Dealers like to get up to 30-35 percent down on a car, and many buyers hope to come up with that amount or down payment by using the cash value of their trade-in. Next comes a square that represents the price of the car you are buying – including fees and other dealer costs that get tacked on to the total bottom line price. Then there are blocks for the down payment – not the trade-in value but the actual cash money down payment component – and last but not least a square that shows your monthly installment payments for financing the deal.

While all that sounds perfectly boring, harmless, and nothing to be worried about, the way that the salesperson fills in the squares – and keeps adjusting them so that they favor the dealership and cost you more money – is the key to the whole technique. When your trade-in value goes up, for instance, that works for you. But the dealer will then raise the amount of your cash down payment. You might get a lower sticker price in one square, but the sales person will quickly notice that and figure out a way to balance that savings of yours out by adding the cost of the loan or lowering the value of your trade-in.

In other words every time you make progress in one category or section, the sales person will try to counteract that by inflating dealership profit in another section of the calculation. To fight back, it is a good idea to have your own 4-square sheet in front of you to help you keep track of the moves made by the dealer in this classic chess match of negotiating for the best car price and auto loan deal.

Payday loans – or payday cash advance loans – have become increasingly popular during the recession as people struggle to make ends meet and avoid missing payments or bouncing checks when money runs low but bills still have to be paid. But those who are experts in personal finance warn that the ridiculously high interest rates that companies charge to provide these short term loans is a one of the biggest lender rip-offs in America.

They point out that in terms of annual percentage rate or APR, the interest charged on a typical payday cash loan transaction is as much as 40 times what other lenders charge. They feel that these loans are such a bad deal for consumers that they should only be used in a dire emergency, when borrowing for a week or two to tide you over until payday will prevent you from incurring more serious financial consequences.

If your car needs to be repaired in order to get you to work, for example, and the only way you can pay for that is to take out a payday loan, then you might be able to justify it. Or if you will bounce a few checks – and get hit with charges of $25 or $30 each by doing so – then maybe taking out a single payday cash advance loan for $15 or $20 to cover those checks might make good sense. But ordinarily it is better to dip into savings or use a lower interest rate credit card advance in such emergencies.

So if you have no other way to borrow money and have no savings to fall back on, a payday loan may be sensible in a situation where it will save you from paying a lot more money in penalties or where it will rescue you from a bad situation like the loss of your job. But payday loans should never be used frivolously, for shopping sprees or things you do not absolutely need – because you wind up paying far too much in the long run.

Apply for a loan with a low score and you run the risk of being denied – or being approved for a loan with higher interest and steeper fees and charges. So smart consumers plan ahead and take steps to clear up blemishes on their credit reports before they ever apply for a loan. By doing things to improve their FICO score ahead of time, they can dramatically enhance their chances of getting a more attractive loan.

One recommendation often given to those trying to improve their credit is that they carry a manageable loan balance on one or more credit cards. The logic behind this advice is that consumers can prove how responsible they are by carrying a balance and then paying it off – including the interest charges – in a timely fashion.

That’s true, but it is not always necessary. Here’s an explanation why it might be better to not carry a balance and save on those additional interest charges:

While mortgage brokers and others might encourage you to carry a small balance on your card for a few months before applying for that important loan, that common advice is somewhat incorrect. All that is really necessary is for you to have at least one loan account that is at least six months old. That way the credit scoring agency can see your recent history, and if you have made payments on time while the account was open you get credit for that. But you don’t have to keep carrying a balance. You just have to have had some activity in the account within the past six months, and the account needs to have been open for more than six months. Plus it does not have to be a credit card account. You can accomplish the same thing with a car loan, student loan, department store loan, or other type of consumer loan.

Since credit card debt tends to be the most expensive kind, you might want to build your credit score using another kind of loan – and a different strategy as explained above – instead of using the old approach of carrying a credit card balance. You can save money while still raising your FICO score through responsible borrowing habits.

Merchant cash advance or business cash advance loans – which came into being over the past 10 years – are gaining in popularity because they offer a relatively hassle-free means for business owners to get loans during a time of tight credit and economic difficulty. The way the loans work is that the borrower puts up no real collateral, does not make any down payment, and usually does not pay any upfront costs or application and closing transaction fees. Instead the lender asks for proof that the business is legitimate and viable and that the business owner handles a robust volume of credit card charges from its clients and customers. There is no fixed repayment plan involving amortized monthly installments, either, because the loan is paid back by giving a percentage of future credit card sales revenues to the lender.

So if you own a restaurant, for example, where most of your patrons use credit cards to pay for their meals, a merchant cash advance lender might agree to give you a loan of $50,000 in exchange for repayment totaling $70,000 that will be taken over the next year or two as a portion or cut of your credit card sales. The interest rate, as this example illustrates, is extremely high when compared to traditional bank loans, and that is the main downside of the business cash advance loan for a borrower. But those who use this kind of loan have typically been turned down by all other traditional lenders so they turn to this easy but high-interest method of borrowing as a loan of last resort.

Because there is no fixed repayment schedule and the repayment is contingent upon taking a percentage of credit card revenues, the borrower will repay more in a profitable month and less when business is slow. That works out well for businesses struggling in the recession, and it also means that the merchant cash advance loan industry is not regulated under legal mandates and oversight like banks and other conventional lenders are. That lack of regulation – coupled with interest rates that go as high as 300 percent in some cases – makes these loans riskier and much more controversial, but business owners who use them say they have few other options since banks have already denied their loan applications.

During the peak shopping days in the USA – between Thanksgiving and New Year’s – it was discovered that many unsuspecting consumers were being systematically and routinely overcharged on their credit card purchases. But this was not a case of cyber hacking, organized crime engaged in deliberate fraud, or shoppers doing business with sketchy and deceptive fly-by-night businesses run by sleazy merchants and outright crooks. What was so surprising and alarming about these unwarranted and mistaken credit card charges – where customers paid more than that thought they were paying – was that they all happened in big name chain stores with nationally recognized brand names and reputations.

Investigators attributed the overcharging trend to systematic problems with store credit card software programs. Customers might pick up an item from a store shelf, for instance, but when they handed over their credit card at the checkout register the price that was rung up and charged to them was different than the price tag on the item – and significantly higher. Because most of us tend to trust these large chain stores that have a strong presence in box stores and major shopping malls we rarely study our receipts to make sure the charges are correct. We just assume that when the clerk scans the barcode or price tag and then swipes our credit card that everything is fine and dandy. We sign the receipt and think nothing of it.

But somehow the systems that scan appear to have experienced some flaws, so that they read price tags wrong or somehow or other wound up charging extra. Once a few consumers discovered the problem and complained, investigations began and even more customers came forward to report that they too had been overcharged. Most of the glitches were fixed, customers were refunded money owed to them, and holiday shopping continued as usual. But the lesson learned is that whenever you use your credit card to buy something, it is a good idea to double check the math on the receipt. Otherwise you might wind up paying more than you bargained for due to a computer glitch or other kind of systematic flaw or oversight.

Officials in Washington recently enacted new credit card laws to ensure better transparency regarding card terms, fees, and interest rates, and under this new legislation known as the CARD Act, consumer protection will begin to increase in 2010 - starting February 22nd.

Already millions of cardholders have gotten notices from their credit card companies to inform them of changes that will start to show up on their monthly statements. Among those charges are new statements that are formatted in such a way that the print is larger and easier to read – to eliminate hiding of details in the small print. Payments will be due on the same day each month, and if you make an extra payment on your credit card account it will automatically be applied to the balance that carries the highest annual percentage rate or APR. In the past card companies applied such credits to the lowest APR balance as a way to increase profits at the expense of the consumer.

Under the new CARD Act rules, your card’s interest rate will generally only go up if your promotional rate expires, the account has a variable or adjustable rate and prevailing rates such as the prime rate rise, or if you fail to make a payment on your account for more than 60 days. Even in cases where your rate is going to be raised due to non-payment you will be notified in writing ahead of time. Meanwhile rates on new balances will not go up for the first year that you have your card account – unless the kinds of stipulations outlined above come into play.

Other consumer protection policies being enacted as a result of the CARD Act and new credit card laws include the introduction of more budget management tools to help the cardholder figure out how to better handle their finances. All of the changes under the CARD Act are good news for consumers, despite the fact that many consumer protection groups still think that Congress should have gone even farther in terms of enacting controls on what card companies can get away with as they try to profit from their customers.

One of the worst natural disasters in modern times struck the small island of Haiti at the beginning of 2010, and as people around the world come together to extend a helping hand many do it with a touch of their fingertips to a cell phone. That’s because modern telecommunications technology has made it easy and simple to donate to charity just by sending a text message. While this is new concept that has never before been used in such a widespread and urgent manner, it has taught us new lessons about how people can respond in emergencies faster thanks to new gadgets and technology.

Many people wanted to help the displaced and stricken residents of Haiti, for example, and were able to do it instantly by simply texting a short number code. A donation of, for example, $10 will be sent to help the effort in Haiti and then be added to their next phone bill. Others are sending similar texts from their phones – day and night and from all parts of the globe – in order to contribute to various charities like the International Red Cross. Phone companies are facilitating this kind of high-tech donation process by waiving the fees they normally charge customers for sending a text message, and they are also ramping up efforts to speed along the donations as quickly as possible and get the money to charities and relief agencies ASAP.

Carriers including Verizon, Sprint Nextel, T-Mobile and AT&T, for instance, said they will get the donations to the Red Cross within a week’s time – a remarkable accomplishment compared to comparatively slow fund drives and donation campaigns of the past, back when cell phone technology could not play this kind of important role.

Text giving was practiced in a limited way during the Katrina disaster a few years ago, and it raised about half a million dollars. But in just a few days – because of the widespread use of texting in today’s world – more than $27 million was donated in this unique manner.

As the market for smart phones in the USA hit a new benchmark of an estimated 15 or more people out of every 100 cell phone users, the scramble to load those pocket devices with high-tech applications also hit warp speed. One of the newest ideas to come off the assembly line in early 2010 is from none other than Twitter co-founder Jack Dorsey. Dorsey announced his new company – which is named Square – by tweeting the announcement to his twitter friends and followers. Square lets merchants and individuals accept secure payment from credit cards using a mobile phone. So in a sense it is like PayPal – an Internet-based company that lets its registered users send and receive cash from anywhere in the world by simply using an email address.

But Square will make it even easier, because instead of logging on to an online account all you have to do is find a merchant with a special card-reader device that hooks up to the smart phone’s audio input. Then you sign your phone with your finger, the transaction happens via Square, and you get a receipt for you purchase by email. To make it secure – and to protect users from credit card fraud – the Square includes a photo of you in the application, so the merchant can verify that you are who you say you are and did not just lift the phone from somebody else.

In practical terms that means that you can walk into a bar at the beach, for instance, carrying nothing but your cell phone. The bartender activates it to create your tab, and that’s it. After you have bought rounds for you and all your friends, the bartender just charges your credit card account through the Square application – and you never have to worry about carrying plastic or handing over a credit card to a stranger.

Sign-up is a cinch, and Square says that all you have to do to start accepting payments through the system is to spend one minute registering. There are no contracts, monthly service fees, or other hidden charges, and Square also donates one cent from every transaction to the charity of the payer’s choice.

Almost every consumer borrows money, and most people borrow it in a number of different ways. But too few of those who take out loans really understand how loans work. Without knowing the basic mechanics of a typical consumer loan it is impossible to figure out whether the loan is a reasonably priced one, an exceptionally attractive good deal, or a total rip off that will only lead to financial losses. To help you understand the nature of your loans – and what makes them tick – here are some pointers and insights about the components of the typical consumer loan.

One of the most critical parts of the loan to pay attention to is the APR – which stands for “annual percentage rate.” This is the interest rate you will be charged on the outstanding balance of your loans, so the higher this number is the more you will have to pay for the privilege of borrowing someone else’s money. When that APR is low, on the other hand, it means that you are borrowing money at a cheaper or discounted rate. 

Usually lenders offer a low APR as a teaser to get you to sign up for a credit card or other loan-based product, and then when the introductory offer expires – usually within a few months – your APR can climb much higher. So be sure to study the loan terms of these offers to see what rate you will wind up with over the long haul. You will also want to know that in exchange for a low and attractive APR, many lenders will make the repayment period longer. So although you are paying less you have to pay it over a longer time, which can cancel out the benefits of a cheaper APR.

Other parts of the loan that can raise your overall cost to repay it include any “origination fees” or fees the lender charges to start the loan. There may also be a “prepayment penalty” in the wording of your loan contract which means that if you decide to pay off the loan early you will have to pay a stiff fine.

Ideally you should look for loans that have a shorter schedule of monthly payments, a low APR, and little or no extra fees and costs attached to them. Avoid those that are structured in the opposite way, because those will likely cost you more than they are worth. In that case just keep shopping for a loan with more attractive mechanics.

Auto loans – unlike other types of loans like home loans or student loans – are still one of the most misunderstood ways to borrow money and create more pitfalls for consumers than almost any other kind of loan. That’s because while car and truck buyers focus on other car buying tips like haggling with dealerships to get the best discount off the sticker price, they step into a minefield when it comes to paying ridiculously high interest rates or fees on the dealership’s auto loan financing.

 

The first thing to know about buying a car is that many car dealerships are not really in the car selling business, they are in the money lending business. That’s why they can sell you a car at a huge discount to the sticker price – at just a couple of hundred bucks above the dealer invoice price – and still stick it to you and make thousands of dollars in profits by offering you financing that guarantees they come out way ahead. So keep that in mind when shopping for a car. You may purchase a decently priced car or truck, in other words, but what you are really buying is an expensive loan.

 

That means you may also wind up buying an expensive vehicle in the end, because if the auto loan is not structured to your advantage then you may end up having to sell the car for a loss, forfeit it back to the dealer through repossession, or keep paying for it long after it has broken down.

 

So instead of buying with a dealership loan, show up at the car showroom with your auto loan paperwork already in your hands. You can get a reasonable auto loan from a bank or credit union, for example, and if you have the financing squared away before you buy that lets you concentrate on what is important when buying a car – namely getting the car that is perfect for you and negotiating the best bottom line price. Take the dealer rebate, for example, pocket that savings, and use it to start paying off your auto loan. You’ll have the best of both worlds with a great car plus a great loan, something that rarely happens to naïve auto buyers who fall for the gimmick of borrowing money through a dealership’s financing program.