Military Money Might

Research, Buy, and Insure Your Next Car Purchase With USAA’s New Auto Circle Program

Hank — Wed, 28 Jul 2010 12:40:56 +0000

I hate buying a new car. I dread it. I don’t know anything about cars. I grew up in the suburbs, the son of a single mom trying to just make ends meet. My mom and I were so clueless about cars, buying and maintaining them, when I was growing up that we would take the car into the dealership for the littlest problem or even to get the oil changed. Now, looking back, I can see how we were definitely taken advantage of and paid for it dearly with money that barely stretched to cover the basics as it was.

Now, I find my wife and me making some of the very same mistakes with our own car purchases. Buying a new car is such a time consuming and aggravating process. It takes so much time and effort to research a new car purchase. Eventually, I find myself getting frustrated and making a less than optimal snap decision on a car, financing, and options only to regret the way I handled it later.

Car Buying Doesn’t Have To Be A Pain

USAA has taken the process to a whole new level for their members and taken most of the pain out as well. For years, USAA, the financial services giant has had a car buying service. They, of course, are one of the leading insurance providers to members of the military and their families. You can also find car financing with their banking division, but there used to be huge walls separating the three business entities all housed under the same roof at USAA’s massive San Antonio, Texas headquarters which made the car buying process cumbersome. I can remember financing my very first car with USAA (I’ve been a member for over ten years now). I called and got preapproved for a bank loan first. Then, after getting my approval, I was on my own more or less to find a car and negotiate the sale. And, finally, I had to be call back to the insurance folks to set up my policy. But, no more!

USAA’s Auto Circle Launches August 4th

USAA is launching its own complete car buying experience on its website August 4th called Auto Circle. The new program brings together the synergy of USAA’s separate financial products under one online portal at www.autocircle.com and adding an incredible array of research tools as well that will streamline and ease the process for everyone, especially those of us who hate it like I do. Over the past two days, I have had the chance to test drive the new car buying service and website at USAA’s global headquarters in San Antonio, Texas. And, I have to tell you that I am very excited about all this new program offers USAA members.

Incredible Research Tools

Now, all on one place, you can buy your car from start to finish. You can research different cars, both new and used, that are available through a dealer network of over 3,500 dealerships across America that have been vetted by the folks over at USAA. When you find one you like, you see an incredible wealth of pricing data. You see what the MSRP, dealer’s costs, discounts available, and the price that USAA’s incredible buying service can get for you. The best part is that you then can download and print a price guarantee certificate to take to your local dealership in USAA’s network. You are guaranteed that price on your new dream car or you can try your negotiation skills around town with your certificate in your hand. But, before you leave the Auto Circle website, you have links to apply for your new car loan and links to set up your insurance policy or add it to your existing policies. These options are all under one website. No longer do you have to call back on the 1-800 number and get transferred around and around to different departments to conduct your business.

Giving Consumer Reports A Run For Their Money

USAA is also rolling out a comprehensive list of USAA preferred automobiles that they feel are wonderful potential selections for their members to purchase. USAA has painstakingly rated new cars based on factors such as reliability, safety, fuel economy, price, and of course insurance cost. Have you ever wondered just how much a V-8 Ford Mustang GT compares over its younger, standard V-6 brother? How much would you save in gas and insurance costs by choosing the V-6? USAA knows thanks to their huge historical database over the past eighty-eight years, and now they are sharing those recommendations by listing great cars like the V-6 Ford Mustang, the Toyota Highlander Hybrid, the Mercedes ??, and several others as USAA Preferred Cars. In addition to those recommendations, there is also a forum for USAA’s members to provide feedback to one another on cars that they liked or did not like and why. 80% of people know what kind of car they want before they walk into the dealership thanks to the recommendations of their friends, family, and coworkers. Now, you can tap into over seven million of your newest friends that will help tell you which cars to stay away from.

Buy, Insure, and Finance Your Car From Your iPhone

As if this new program wasn’t enough, the folks at USAA, who brought you an iPhone app that lets you deposit a check in your bank account from home, are including Auto Circle on the next version of the bank’s iPhone app that is already available from Apple’s App Store. The new upgrade to the USAA homepage app on the iPhone and Touch iPods will be available the same day the Auto Circle website launches, August 4th. You will be able to buy, finance, and insure your car all from your iPhone. They are also working on a version for the Android and are considering an app for Blackberry phones as well.

I have seen firsthand some of the innovative ideas and products that USAA is coming out with in the near future. I always forget that USAA is a Fortune 200 company with over 22,000 employees around the world, 7.4 million members, and over $100 billion in assets and investments under management. It is a huge company with a huge research and development division that strives to create incredible financial products for its membership to use. It should be no surprise that a company that broke the mold on depositing checks by taking a picture or scanning them instead of mailing them into your bank would come up with an iPhone app that would let you buy a car all the way through the process from idea, research, loan, purchase, and insurance.

I am very appreciative for USAA flying me out to San Antonio to check out their headquarters and their new products like Auto Circle. I am truly excited about all of the innovations that the company is making and truly believe that Auto Circle will be a great experience for USAA members who are looking to buy a new or used car and who are fed up with the old way of doing it and getting taken advantage of.

Know The Factors That Make Up Your FICO Credit Score In Order To Improve It

Hank — Tue, 27 Jul 2010 12:00:22 +0000

For all intents and purposes, there is only one credit score. There is only one score that you should be worried about maintaining if you want to borrow money, your FICO credit score. All three of the credit bureaus have their own version of a credit score, but 90% of all lenders use the FICO score. The FICO credit score was developed by the Fair Isaac Corporation, which has been in the business of credit scoring since 1958, and the FICO credit score has become the standard benchmark that lenders use to separate risky borrowers from primer ones. If you currently have a score that has seen better days, then you need not despair. Your credit score can improve if you learn to handle your credit more wisely. Time heals all wounds. Any negative marks can start to disappear with the passing of time. Even a bankruptcy will be expunged from your credit after seven years. Make timely payments and pay down your debt and you will see your score gradually improve. A poor score doesn’t necessarily have to follow you around forever.

Items That Don’t Factor In Your FICO Score

Certain items are not considered when calculating a score. These include:

• Your age
• Your occupation
• Where you reside
• Specific interest rates being charged on certain credit cards
• Child support or alimony payments
• Whether or not you are attending credit counseling

What Is Included…

Your FICO credit score factors in a host of data from your life in an attempt to accurately place a score on your likelihood to repay debt. It is dependent on such things as your payment history, delinquent account information, how much you currently owe and what you currently owe. The score also factors in things like the length of time credit has been extended to you and the number of inquires into your credit report and history. Judgments, liens and bankruptcies are considered as well. The Fair Isaac Corporation uses five main categories in their proprietary formula: payment history, amount currently owed to lenders, length of history, types of credit extended to you, and if there is any new credit. Each one of these categories is even further broken down into criteria the company looks for in a good borrower. For example, when the company looks at your past payment history on loans you have had, they look for presence of adverse public records (bankruptcy, judgements, suits, liens, wage attachments, etc.), collection items, and/or delinquency (past due items), severity of delinquency, amount past due on delinquent accounts or collection items, time since past due items, adverse public records, or if there are any collection items filed, number of past due items on file, and number of accounts paid as agreed. As you can see, there is a lot of information that comprise your credit score.

Inquiries – How they Affect Your Credit Score

While it’s true that applying for credit can reduce your score somewhat (you are seen as more of a risk by creditors), you don’t have to worry too much if you’re applying, say, for funding for a car or a mortgage. There are two different types of inquiries that are made against your credit score: a soft pull and hard pull. A soft credit check is when you send a request to a credit bureau to look at your score or credit report. A soft credit pull does not affect your credit score. There are many times when you may not even be aware that one occurred such as when a credit card company does an initial check when researching you for a “pre-approved” credit card offer. A hard pull is one that does affect your credit score slightly because those occur when you are actively seeking new credit such as when you are shopping for a mortgage or a car loan. When you shop around for a mortgage, for instance, several credit score inquires made in a short time span are recognized as one inquiry.

Scoring is designed to gauge how well a person can pay back his or her debt. Your score is your grade, like an SAT or ACT score to get into college, on your ability to handle debt. It is a general numerical summation of all the details found in your credit report. If you must borrow money, then you need to know and understand how your FICO credit score is calculated and what factors of your financial life go into it.

Blogging This Week From USAA Headquarters In San Antonio, Texas

Hank — Mon, 26 Jul 2010 12:00:56 +0000

Over the next few days, I will be blogging live from what I consider to be the mecca of money and the military, USAA. I think that the only bigger or more important place to discuss military money issues would be the Defense Finance and Accounting Service (DFAS) offices. I’m still waiting for my invite to DFAS headquarters. But, until then, I am extremely excited to visit USAA’s company headquarters in San Antonio, Texas. Most of you know that USAA is an all-encompassing financial services firm that is dedicated to serving members of the military, veterans, and their families with a wide range of products from banking, investments, insurance, financial planning, and tons of other financial products.

This week, I have been invited to USAA’s headquarters in San Antonio with several other military and money bloggers such as J Money from BudgetsAreSexy, Ryan Guina from Cash Money Life, Brandy Woodley from Army Wife Magazine, Wendy Poling of My Military Life, Dan Kissinger of Military Avenue, and several others. The group is traveling to Texas to learn more about USAA and its programs, financial products, and services. In fact, USAA is launching a mobile iPhone app to complement its successful car buying experience. How would you like to find, finance, and insure your next car purchase with the touch of your Apple iPhone? It’s coming! You can check out CNN Money’s story on USAA’s new iPhone App.

If you have any questions or comments you would like me to possible express on your behalf to USAA and their staff, send them to me at militarymoneymight[at]gmail.com, and I will do my best to get them answered over the course of my trip.

Photo provided by USAA.

Contact Your Senators To Amend The Volcker Rule To Protect Companies Like USAA

What Happens When The Thrift Savings Plan’s 2010 Lifecycle Fund Rolls Over?

Hank — Fri, 23 Jul 2010 14:11:49 +0000

The very first lifecycle fund in the Thrift Savings Plan will reach its target date this year and is set to expire. In 2005, the Federal Retirement Thrift Investment Board which manages the federal government’s version of the 401k, the Thrift Savings Plan also lovingly known simply as TSP, formed five target date retirement funds which are called lifecycle funds. The lifecycle funds are comprised of elements from each of the five TSP index fund options available to members of the military and federal government.

What Will Happen To The 2010 Fund? The L2010 Lifecycle Fund which will end in December 2010 will transfer into the L Income Fund, the most conservative of the five funds. A new fund, the L2050 Fund, will begin operations in January 2011. Investors in the L2010 Fund need to understand that there will a transfer of their investments from the L2010 Fund to the L Income in December. One aspect to be aware of is that the L Income Fund is even more conservative than the current asset allocation of the L2010 Lifecycle Fund. The L Income has an investing mix of 74% G Fund, 6% F Fund, 12% C Fund, 3% S Fund, and 5% I Fund (as of July 22nd, 2010). While the asset allocation differences are subtle, investors still must be aware of the changes in their potential investing returns with a reduction in risk.

Target Date Retirement Funds. A target date funds, which are also known as a lifecycle or age-based funds, are collective mutual fund investments that are designed to provide a simple investment strategy through a diversified portfolio of other mutual funds that become more conservative as the target date or retirement approaches. With each passing year as an investor gets closer to their designated age of retirement, the assets in the target date fund will become more conservative by selling stocks and buying more bonds and holding more cash. For example, the L2040 Lifecycle Fund of the TSP for those individuals planning on retiring in the year 2040 currently has 80.5% of its assets invested in stock (through the C, S, and I Funds of the TSP) and 19.5% invested in bonds and cash equivalents (via the G and F Funds of the TSP). The L2030 Lifecycle Fund of the TSP, in comparison, holds 29.5% of its assets in bonds and cash in order to preserve capital for a closer retirement. As the date of retirement draws closer, the fund automatically transfers a greater portion of its assets to safer investments. The Lifecycle Funds offered by the Thrift Savings Plan (TSP) are for all intents and purposes exactly like target date funds under a different name. Don’t let the nomenclature fool you. It is one and the same.

Young Investors. Younger investors need to be aware that a new fund (the L 2050) will begin in January which will focus on young members of the military and federal employees who have forty years or more until retirement. This fund is geared towards individuals age thirty and younger and provides an excellent diversified option for their TSP allocations.

There are many options available to members of the military and federal government employees when they invest in the Thrift Savings Plan. Check out TSP’s brand new website to learn even more details and specifics about the different funds in the plan.

Fight The Enemy Not Your Plan When Paying Off Credit Card Debt

Hank — Mon, 19 Jul 2010 12:00:32 +0000

There is a saying in the military, “Fight the enemy, not the plan”. Far too many times in a battle, many military leaders are wed to the plan that they came up with. No matter what the enemy does on the battlefield, historically the military leadership tries to continue fighting accounting to the war plan that was developed despite its flaws that come to light on the actual field. An enemy is a fluid opponent that does not necessarily play by the rules or the playbook that you drew up beforehand. So, a commander has to adapt his plan and fight the enemy.

The same can be said for most people’s fight against credit card debt. They develop a wonderful and elaborate plan of attack, but then they find out that the circumstances of their lives do not quite fit into the mold. But, still many people do not adapt their plans. They continue trying to shove a square peg in a round hole because that was the original plan. The hole just has to be square. That was the plan.

Be Fluid. There are all kinds of ways to get out of debt. Dave Ramsey recommends the debt snowball method where you pay off your smallest debt first and then throw all that money at the next smallest debt until they are all paid off. Many others recommend paying off your credit card with the highest interest rate first in order to save you more money in the long run. Most financial planners recommend stopping retirement account contributions and other investments until you get completely out of debt. There are many ways to skin the cat. But, which one is right for you? The plan that you make at the beginning may not be the one that you can continue with all the way through to the end thanks to twists that life throws at you.

Adapt And Overcome. When US Army Paratroopers jumped out of their airplanes over Normandy, France, they were miles off their intended marks. They were scattered all over the place, separated, surrounded, and on unfamiliar ground. They had to adapt their original plan to the reality of what they now faced on the ground in France. The same thing applies to you. Were you working through your debt snowball and just find out that you are going to be laid off on Friday? Time for a change of plans. Did you just find out that your wife is pregnant or that you have to move across the country? These are definitely life events that will through a monkey wrench into your plans.

Results Are All That Matter. In the military, they call it commander’s intent or the endstate. What do you want your debt to look like in the end, when it is all said and done? You want to be out of credit card debt of course. You want the freedom to invest, save, and live your life the way you want without being tied down to minimum monthly payments. In the grand scheme of things, it does not matter if you pay off the highest interest rate credit card first or the smallest balance. You may pay a little more in interest, but either way in the end you will have paid off your debts. And, that is all that really matters.

Do not fall in love with your original plan if it is not working for you. If life presents you with a new set of obstacles, change your plan to suit your needs. It is okay if you do not follow the plan exactly as long as you are heading in the right direction. The end goal is all that matters. Fight the enemy and the life circumstances that are before you in order to get to the finish line and begin living a debt free life.

Why You Should Consider VA Home Mortgage Loan Benefits Over Conventional

Hank — Fri, 16 Jul 2010 12:00:51 +0000

This is a guest post from Adam Gibson who is a writer at Accrued Interest, a finance blog. Check out Accrued Interest for the latest on the bond market, treasuries, mortgages and other financial news.

Now that you’ve found the home you want to buy, it’s time to weigh your financing options. Conventional loans are available at your local bank, sure, but the credit crunch makes it tougher to get a mortgage you can afford.

Then there’s a VA loan. Qualified veterans and active-duty personnel have the privilege of a 66-year-old home loan program. Besides being easier to qualify for, a VA loan features a multitude of financial benefits unprecedented in a conventional mortgage. As interest rates flirt with record lows, conventional mortgages look appealing. However, it takes a superb credit score of about 740 and untainted financial history to lock in those rates.

Even if you could land those rates, expect to pay up to 20 percent down. With a VA loan, you may qualify for no money down, allowing you to finance a home valued up to $417,000 without paying a dime. In more-expensive housing markets, the loan limit exceeds $417,000. Additionally, VA loan borrowers often get lower interest rates because the VA insures up to 25 percent of each loan. This insurance against default reduces the risk assumed by the VA mortgage lenders, thus making them more likely to issue lower interest rates.

Low VA mortgage rates are only one of several reasons why VA loan benefits dwarf those of conventional options.

Up front, conventional loan borrowers often drop thousands on big down payments plus appraisal fees, origination, and closing costs. If these borrowers roll these fees into monthly payments, their interest rate balloons because the lender assumes more risk. When borrowers use VA loans, the seller can end up paying up to 6 percent of closing and concessions costs. The VA funding fee, which is already miniscule, can be separated into monthly payments without inflating the interest rate.

With the lower interest rates, VA loan borrowers tend to have smaller monthly payments than conventional loan borrowers. Borrowers who serve on active duty have interest rate caps. No private mortgage insurance (PMI) reduces monthly costs even further. Unless they put down at least 15 percent, conventional loan borrowers pay a PMI, adding significantly to monthly payments.

Prospective homebuyers don’t need a flawless financial history to get a VA loan. A foreclosure or personal bankruptcy does not automatically make you ineligible for the program, neither does imperfect credit. Though it’s always a good idea to work on your credit score, VA lenders often look for scores no lower than 620. With either a VA or conventional loan, the higher the credit score, the more favorable your loan will be. On the whole, the conventional financing market gives the best loans to borrowers with immaculate credit history.

Conventional loans occasionally include prepayment penalty clauses. Some prime lenders don’t bother with these penalties or decrease the interest rate if borrowers accept the clause. Subprime lenders aren’t as kind and more often write in prepayment penalty clauses. VA loans have no prepayment penalties, therefore allowing borrowers to pay in advance all they want.

Not every veteran and service member is eligible for the VA home loan program. Veterans must be honorably discharged. Other than that, those who may qualify break down into three groups: military members who served on active duty during peace time, or 90 days during war time, members of the National Guard or Reserves who served for six years, or spouses of service members killed in the line of duty.

Given the plethora of advantages that come with VA loans, it’s a no-brainer for qualified borrowers. If you’re unsure of what type of mortgage best suits you, contact a VA mortgage lender for advice.

Your Payments Are Not Your Only Costs When Buying A New Car

Hank — Wed, 14 Jul 2010 12:00:34 +0000

The cost of an automobile, whether it is new or used, can put a big dent in your monthly budget. Therefore, it is typically best to shop around for a car both online and in brick and mortar dealerships in order to get the best deal possible. Outside of your home, a car is most likely your biggest purchase. So, you should take your time and make the best decision possible for your family and your finances. After all, there is more than looks to consider in your new ride. In fact, there is a lot more than just your monthly loan payment that goes into the price of your car. You also have to consider things such as the fuel use, yearly maintenance costs, and insurance costs.

Consider Insurance Costs. It is best to initially start your search for a new vehicle online so you can take your time, see price ranges, and make a sound decision about how much your dream car will probably cost. You need to check with your insurance carrier about the insurance rates for a new vehicle or the types of vehicles you are interested in buying. You may be tempted to buy a red convertible, but you also have to factor in the amount of insurance you will pay for such a car. It will not do you much good to save money on your monthly car loan payments if you are just going to be taking to the cleaners in insurance costs. Also, your insurance company will factor the likelihood of theft into the cost of your future premium. Certain models are at greater risk than others.

Average Gas Mileage? Another factor that has been all the rage and garnered a lot of press over the past few years is gas mileage. While not a sexy cost to consider, it is one that should be taking into consideration with the entire cost of the car as well. While you may fall in love with the looks of a certain gas guzzler, you still have to think about the total futures costs for all of that fuel.

Maintenance Costs. Did you realize that the average American spends approximately $1,200 per year on maintenance costs per car? You might go months without paying for very many repairs or tune-ups, but eventually you will get caught up in a one time $500 car repair bill. That is always the way it seems in my family.

You need to look at all the costs associated with the make and model of the car you are planning to purchase. You can get a better idea of your total new car cost if you consider all of the associated expenses of new car ownership such as gas, insurance, and maintenance which are the hidden costs. There is no substitute for adequate research before you buy. Having a good understanding of all the costs of a new or used car before you decide on any vehicle will help arm you with all the details you need to make a sound financial decision on the car of your dreams.

Twelve Car Buying Secrets from an Insider at the Car Dealership

Thrift Savings Plan Launches New Website

Hank — Tue, 13 Jul 2010 12:00:14 +0000

The Thrift Savings Plan unveiled the new TSP Website yesterday in the hopes of improving users’ experience and navigation. Now, the site has everything in an easy to navigate layout. The Federal Retirement Thrift Investment Board, which oversees the TSP, announced the redesign in July 2009 and finally got the new site up and running a year later.

The redesigned website includes easy to find information about who is eligible for the retirement plan, investment options, loans, savings and monthly payment calculators, and guidance for new life events like entering and leaving military service or steps to follow after an investor’s death.

A lot of the changes that the site made were in response to users’ comments and suggestions, and even more changes may continue to evolve the site. The web portal is based around organized sections that allow easier and faster access to your account.

Overall, the new changes are a great upgrade to the website and long overdue. Now, users will easily be able to navigate through their account and its many functions and receive answers to any questions that they may encounter about the plan and their retirement options.

Test Drive Your Retirement Dream Before You Quit Working

Hank — Mon, 12 Jul 2010 12:00:19 +0000

I have written several times about the importance of having a retirement dream. Mine used to be having a million dollars, a post office box, and a sailboat without a care in the world. That was when I was a teenager and did not know any better. Then, in college, my retirement dream transitioned to playing every golf course in South Carolina which isn’t a bad option now. But, there are a lot of courses throughout the state. Now, my wife and I have been toying with the idea of visiting all thirty Major League Baseball stadiums in a single summer.

Changing Dreams. It is okay to change your retirement dream throughout your lifetime. We all grow older and a little bit wiser, and our likes and ambitions change as well. The most important thing is to have a retirement dream. You need to have a goal to work towards. It is okay if it is a stretch goal that might be just out of your reach. You need goals and dreams like that. But, we also need a reason for all of this hard work saving, investing, and being frugal. It all has to be worth something in the end. There has to be a payoff. And, the payoff is your retirement dream.

Mini Retirements. Tim Ferriss discusses test driving mini retirements throughout your lifetime in his book, “The 4-Hour Workweek“. What if I had made it all the way to retirement to find out that I get seasick? That would be a heck of a time to find that out. That would be just my luck too. So, it is important to test drive your dream retirement. My wife and I recently returned from a weeklong vacation in Washington, DC. We went up to our nation’s capital to see the sights and to take in a Washington Nationals’ baseball game. After several days enjoying ourselves, my wife actually realized that if we drove just a few more hours north, then we could see our beloved Atlanta Braves play the Philadelphia Phillies. We had an idea to keep going to New York as well to see the take on the Mets!

Emergency Funds Enable You. We were lucky to have the luxury to be spontaneous. We have a fully funded emergency fund with three to six months of living expenses that protect us from overspending or unforeseen troubles. We budgeted for the vacation but were also able to expand it when the opportunity presented itself. Our emergency fund provided us with freedom. That is the beauty of having savings. We can act like our own credit card and lend ourselves money without having to rely on plastic and sink backwards in debt.

Test Drive Your Retirement. Did you know that you can rent an RV? Have you ever thought about spending your retirement traveling around the United States? That sounds pretty great to me. Larry and Connie Farquhar, who publish a series of travel guides about U.S. Military Campgrounds for military members and retirees, are doing just that, and they are chronicling their adventures on their blog, http://www.happy-wanderers.com. One great thing that I really like about their blog is that they share with their readers exactly how much their RV retirement lifestyle costs.

Thanks to Your Military Money for the heads up on about Larry and Connie.

Investing 101: Understanding The Federal Thrift Savings Plan Retirement Fund

Understanding Why Payday Loans Are A Very Bad Deal

Hank — Mon, 05 Jul 2010 12:00:55 +0000

Lets face it, most people who have to turn to a payday lender for a loan are scared. Many feel like they have no other option because they need the money right away, have poor credit, or do not know that there are other options available instead of taking the high interest rate loan from a payday lender.

According to the Community Financial Services Association of America (CFSA), more than 22,000 payday advance locations across the United States extend approximately $40 billion in short-term loans to millions of people that experience cash-flow shortfalls between paydays. To give you a simple comparison, Starbucks has 8,624 U.S. locations and McDonald’s about 14,000.

When a customer receives a payday loan, he or she writes a check for the amount of the loan and a finance charge. The lender agrees not to cash the check until the next payday which is typically in two weeks for most Americans. Payday lenders usually provide the check-writer with $50 to $500 in the meantime. Payday lenders have often been vilified in the media for their high fees and interest rates. Most payday loans have a typical fee of $17.50 per $100 borrowed. So, for example, current law allows lenders to charge 15% of the face amount borrowed which must also include the fee for the loan. So, in order to borrow a net amount of $100, the consumer must write a check for $117.62 ($117.625 x .85 = $100). Most lenders simply round off the $17.62 interest fee amount to $17.50.

The real shock to borrowers comes from understanding the interest rate you are charged. While on the surface it seems like you are only paying the equivalent to 15% interest on your loan ($17.50 on every $100 loaned), people tend to forget that the loans only typically last for two weeks and must be repaid on your next payday. The annual interest rate for most payday loans is equivalent to a staggering 456% APR for the two-week loan if it was rolled over and carried out on an annual basis.

Many critics of the financing say that payday loans are not like business or home loans because payday loan agencies do not evaluate a person’s cost of living or ability to afford the payments. Lenders give a borrower two weeks to repay the loan which is often impractical and most customers cannot fulfill. Many borrowers who cannot repay may choose to rollover the loans several times which may lend to a spiral of more debt.

There are other options for someone who is desperate for cash. You might want to consider borrowing money from a pawn shop, borrowing against your car title, borrowing from friends and relatives, getting a personal bank loan or signature loan, or even peer-to-peer lending through a website like Lending Club. While some of these choices might not be most wonderful options, they are head and shoulders above payday lenders.