There’s something you need to know.
Something that will help you shift your mindset from consumerism to frugalism, and help stop you from getting tricked in financial matters.
Something that most people wouldn’t tell you.
Lenders are NOT your friends.
No matter how friendly they seem. No matter how much they are willing to “work” for you. No matter how much they say they will make it “work for you.”
Lenders are there for one reason and one reason only: to make money off of you.
And there are a lot of tricks lenders use to take your money.
It helps to think of lenders using the following scenario.
Say you pull onto a car lot and are browsing the selection of cars. Before you know it, a salesperson sidles up and asks if they can help you out. You get to chatting and before you know it you are telling them your story. You tell them your desires, and they completely agree. In fact, you “deserve” that fancy car, never mind the cost. Pretty soon you are roped in, but there’s only one problem: you don’t think you can afford it.
Then comes the hook.
Are you ready for this?
We guarantee what we are about to say will be asked in some shape or form EVERY TIME by a salesperson trying to reel you in.
What payment can you afford?
Ding Ding Ding Ding!!!
That phrase is the kiss of death for your finances, and should be a trigger to you to step back and reevaluate the situation.
DON’T GET REELED IN BY THE TRICKS OF LENDERS!
The above example demonstrates clearly how lenders operate. They will “make it work” for you at the cost of your financial security.
The Truth About Lenders
Here’s the deal.
Lenders, and almost all companies and service providers who partner with them to sell products, don’t really care about your long-term financial health. They care about making a sale (companies/service providers) or getting a customer (lenders), and they will do whatever it takes to reach that goal.
Sure, lenders put you through a vetting process (they care about getting their money back, after all), but the ultimate goal of that process isn’t to make sure things are done in your best interest.
The goal of the vetting process is to see what parameters they need to put on the loan to make it work in THEIR best interest.
In other words, what do they need to do to make the monthly payment work for you, and what loan terms are needed so that they get as much money out of the deal as possible?
Essentially, they rig the deck so the house wins every time.
Lenders may finagle the payment to work, but they’ll hit you with OUTRAGEOUS interest and a long-term payoff plan. They may even offer you favorable terms for a limited time to draw you in, then set you up to pay out the nose if you’re not careful, which sets themselves up for a big payday.
Let’s take a closer look at 3 tricks lenders use to take your money to drive home our point.
1. How Much Can You Afford a Month?
First, let’s look at the car scenario we used above. Let’s say you go to buy a car. You’re budget (what you can actually afford) is for a car around $15,000, so you go in looking for something in that range.
Before long, however, a salesperson has appeared and is slowly reeling you into a more expensive purchase because they can make your maximum payment allotment of $300 a month work.
Alas, you fall for it and drive off the lot with a car for $25,000, almost double your budget!
Wanna know how they finagled the loan?
Luckily, you have a fairly good credit score (let’s say 700), so the interest rate worked in your favor (3.58% APR). But, to get that payment down to $300 the loan term had to be stretched out to…
96 months, which is a whopping 8 years!
And how much will you pay over that time?
Good news! We got you under your payment at $299.87 a month! But you’ll pay $3,787.67 in interest along the way.
You’ve now paid $28,787.67 over an 8 year period, and that nice car is 8 years older and not nearly as nice by the time you actually own it.
And if you’d stayed in your budget at $15,000?
You could have still had a $300 a month payment ($301.17 to be exact), but you would only have paid $1,263.01 in interest over a 4 ½ year period for a total of $16,263.01.
You would not only save $10,000 on the purchase of the car, you would save $2,524.66 in interest and 3 ½ years of payments.
The best part is your car would still be new enough to be cool by the time you actually own it!
And just think what they would do if you didn’t have good credit.
2. Bad Credit, No Credit, No Problem!
Bad credit, no credit, no problem! We make it work!
They should have a footnote that says, “we make it work…for us!”
Remember, lenders are in it for themselves, NOT YOU.
Yet another trick lenders use to take your money, and you see ads for it all the time.
Now the caveat here is that you won’t be able to get nearly as big of a loan and have a smallish payment with bad credit. It just won’t happen.
But they’ll still give you a long-termer with a massive payment.
Break out the champagne, I got a car loan with bad credit!
This is going to be painful, but here goes.
Let’s take the same example above, but with bad credit (550). With this credit score you can expect an interest rate somewhere around 14.95% (OUCH!). You buy the more expensive car at $25,000. You’re going to need the longest term loan at 96 months (8 years) to make it work.
What will you pay?
How about $447.91 a month, and a total of $17,999.63 in interest!
Holy smokes! That’s more in interest than the price of the cheaper car!
It really pays to have a good credit score, and to resist the tricks of lenders telling you they’ll make it work.
Please be smart and don’t pay $18,000 in interest on a car.
3. 12-Months No Interest Financing
Now let’s look at another common example of a trick that salespeople and lenders use (and the hidden issues that come along with it if you’re not careful).
Can’t really afford that new (insert some appliance/furniture/whatever here), no problem, we’ll give you (insert months) no interest financing!
Now don’t get us wrong, taking advantage of introductory offers is a great way to beat the system by stretching out your costs over several months without paying interest.
If you know what to look for.
This one gets people ALL THE TIME and why it’s so important to always read the fine print.
Here’s the deal.
Introductory offers of blank months no interest are great IF YOU PAY THE ITEM OFF IN FULL BEFORE THE INTRODUCTORY OFFER IS UP.
If you do not pay the item off in full before the no-interest period is up, THEY WILL CHARGE YOU THE FULL INTEREST FROM THE BEGINNING OF THE LOAN.
Yes, yes they will.
12 months no interest? If it’s not paid off in full over that time they will charge you for the full 12 months of interest that was supposedly “free.”
Don’t be fooled, pay it off.
But there’s a trick there too. Lenders won’t tell you what you need to pay per month to pay the item off by the time the introductory offer period ends. They want your money, so they walk you into a trap.
Take this example.
I (Sebastian) installed a new furnace last year.
Total cost: $5,147.
Not too bad, but not something I really wanted to pay all at once. So I took advantage of the offer from the HVAC company for 12-month no interest financing through Wells Fargo.
Now listen up, because here’s where they tried to trick me.
I received my first statement from Wells Fargo a few weeks later. The minimum payment was $180.15.
You know what I would need to pay monthly to pay the furnace off during the 12-month no interest period?
Wanna know what I’d be paying if I stuck to the minimum payment of $180.15?
It would take me 4 years to pay off the loan, and I’d be paying a whopping $2,907 in interest.
My $5,000 furnace would end up costing me $8,054! Almost double the original price!!
They conveniently forgot to mention that little detail.
They do, however, have an explanation of the terms in little tiny print at the bottom of the statement. This tiny print included the payoff schedules for the minimum payment ($180.15) and another example with payments at $250 a month. They also explained how they calculate the interest using the average daily balance. They even give you a number to call if you have questions.
They have performed their legal obligation to inform you about this loan.
But nowhere does it state the actual payment amount you need to pay off the balance during the introductory period.
Oh no, they don’t want you to know that. They want your money.
Moral of the Story
Lenders are not your friends. Salespeople are not your friends.
No matter what they say or how they make you feel, they only care about making a sale.
They are after your money, and many will use every little financial trick to get it, no matter the cost to you. It is extremely rare to find a lender that always looks out for your best interest, so you must make sure that YOU are looking out for it.
That’s why you have us.
We are on your side at Money Saved is Money Earned. We want you to go into a large purchase with the clear understanding that lenders and salespeople are not in it for you.
We want you to know enough about the tricks lenders pull to “make it work” that you can look out for them in your own life, and make a decision that will truly work for you.
After all, while we may not know everything about finances, we know enough to distrust the lender and look for the catch, and to make decisions accordingly.
Read the fine print, and watch out for the tricks lenders use to take your money.
Talk about Money Saved.
Tawnya is an elementary special education teacher by day and co-blogger at Money Saved is Money Earned by night.
She holds an Honors BS in Psychology from Oregon State University and an MS in Special Education from Portland State University. She has had a pretty successful writing career, first as a writing tutor at the Oregon State University Writing Center, and in recent years, as a freelance writer.
Tawnya and co-blogger Sebastian have a wealth of knowledge and information about personal finance, retirement, student loans, credit cards, and many other financial topics. They teach people how to save money, make money, and understand money.