Beware of loan sharks in America

Beware of loan sharks in America

Looking at financial planning and budgeting on the Internet, I realized that online developments have allowed the return of an old enemy, the loan shark.

Today while I was watching TV (yes I do have some downtime) I was shocked to see the return of the loan shark. It was a very different looking version of the loan shark from previous economic crises. This was a very slick modern looking, Internet based beast that appears to be the answer to your financial problems.

One of the most important about financial planning and budgeting is to learn the difference between, ‘good debt’ and ‘bad debt’. Good debt is when you borrow money and invest it in a business and the returns from the business are larger than the debt payments. Bad debt is when your outgoings exceed your income.

Now certainly in the 1960’s and 70’s loan sharks were common in the U.S. especially among people who know little about banking. People could have obtained a loan or a car loan from a bank however many of these people distrusted banks.

So other wealthier people in the community would offer ’short term’ loans. These were meant to be a ‘one off’ to see you through an emergency. The issue was these loans were never a solution to the real problem. The real problem being a lack of financial planning.

These people then ended up in a never ending cycle of loans each week and the interest rates were high, 25 -50% being commonplace. By the way that is 25% after just a week, borrow $100 and you owe $125.

Now you can guess the next part, they were unable to repay the loan so they take out another ’short term’ loan. In their own mind being convinced they could get out of the situation. Of course the ‘loan sharks’ always intended the people to become dependent upon them.

Back to the modern version, it starts with a nice glossy advertisement. A woman sat doing her budget but unable to make it balance. The picture changes to the same woman this time with a laptop (questionable priorities in spending straight away) and we are told she can go onto a website and get a ‘pay day’ loan.

Of course we are told this is to see her through this short term problem and she can borrow up to $1,000 and have the money in her bank account in 2 hours.

Right at the end of the advertisement is the obligatory legal information. Have you ever noticed this is always written in white, small writing and stays on screen for the minimum time. Well I paused the advertisement and read the legal information.

I was truly shocked by the Annual Percentage Rate (APR) 2278%. Compare that to a bank overdraft – the highest (APR) I could find in the U.S. main banks was 20%.

In the other words the modern ‘loan sharks’ are charging 1000 times in interest than an overdraft (another form of short term borrowing). They may be glossier and based on the Internet however in my opinion it’s still financial suicide to use this type of lending.

The key to improving your wealth is to learn the principles of financial planning and budgeting and put them into practice. Improving this area of your life by just 1% a day will lead to over a 100% improvement in 100 days. In addition the improvement is permanent because you have changed your habits.

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