If you have to borrow, here’s how to do it smartly

CONSUMER FORUM

Posted Aug. 22, 2016, at 6 a.m.

In prior columns, we’ve discussed the need to shop around for low annual percentage rates or APRs when borrowing money. Either a hefty APR or a term that’s too long can add interest dollars that end up making that loan a bad deal.

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That point is among many made in the latest in the series called Downeaster Guides. The newest one deals with high-interest, high-cost loans. Like the others, it is published by Maine’s Bureau of Consumer Credit Protection.

Regular readers of this column know that earlier guides have dealt with a range of issues affecting credit. David Leach, principal examiner with the Bureau of Consumer Credit Protection and co-author of the latest guide, says it explores alternatives to several types of high-cost borrowing, including:

— Buy-here-pay-here auto loans.
— Payday loans.
— Furniture and appliance loans.
— Private student loans.
— Non-bank finance company lending.

As an example, the guide points out that overdraft lines of credit usually carry annual percentage rates or APRs of 9.9 percent to 18 percent or a flat per-item fee. The guide goes on to say, “A line extension of $100 for a couple of days could result in finance charges under $1.00 — a big savings over a payday loan!”

A major component of consumer debt is acquired through credit cards. Many consumers have multiple cards, and many have more debt than they would like on more than one card. The guide advises that consumers might take one of two possible routes to whittle down those debts.

One strategy is called the “avalanche” method. Budget an amount to pay toward lowering your total credit card debt each month. Then, pick the debt with the highest APR and put the bulk of your budgeted amount toward eliminating that debt. Make at least the minimum payments on the other card bills.

When the highest APR bill is zero, use the same strategy on the amount with the next highest rate. Keep the same budgeted amount each month and knock down the balances one by one.

Another approach is termed the “snowball” method. Some financial experts say it focuses on the smallest debts first, while others say consumers focus on paying for the things that matter to them the most.

Leach is in the second school, saying, “Experts agree that the mortgage or rent gets paid first, followed by a vehicle loan payment, because in Maine, we need a car or truck to get to work!”

Some consumers will prefer the avalanche method, while others will find the snowball method more satisfying. The key is to choose a strategy and stick with it.

The Downeaster Common Sense Guide to High Interest/High Cost Loans details strategies to keep debt under control. The guide will be available soon at www.Credit.Maine.gov; click on “consumer guides.” A hard copy is available free to Maine residents by calling the Bureau of Consumer Credit Protection at 800-332-8529 (toll-free in Maine) or 624-8527.

Consumer Forum is a collaboration of the Bangor Daily News and Northeast CONTACT, Maine’s all-volunteer, nonprofit consumer organization. For assistance with consumer-related issues, including consumer fraud and identity theft, or for information, write Consumer Forum, P.O. Box 486, Brewer, ME 04412, visit https://necontact.wordpress.com or email contacexdir@live.com.

 

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