Banks and Alternatives 101: Fees, Fees and More Fees: It all Adds Up

Hey there! Congrats! You're out on your own and thinking about getting all your own stuff. Cruising around the internet looking at giant new TVs and stereos. Maybe taking a stroll through the new and used car listings for local dealers. These are exciting times. But whoa! It turns out stuff is seriously expensive! I mean seriously! This TV is almost $1,000! Who's got that kind of money laying around? And that used car? Holy cats! It's over $4,000! Right about now, it can be super tempting to take a peek over at the local rent-to-own center. And, well looky here. That same TV is only $34.99 a week. Now that's more like it! And, I mean, as long as we're looking, let's just have a look at this little buy here, pay here! car dealership down the block. Whoo! Just $250 a month for this car seems pretty darned reasonable now that I think about it. But wait. What's that little voice nagging in the back of your minds? That little tiny buzz. Can you hear it? It sounds a lot like... WAIT! HOW MUCH IS THE REALLY GOING TO COST ME? The high cost of big-ticket items can make it seem like a really good deal to just focus on smaller, more manageable payments. Usually though, those small payments add up to a much larger total cost. I love a chart. So let's make one here, like this, for some good old-fashioned comparison shopping. Let's have a look at a pretty awesome TV and a not too shabby car to see what you might expect to pay from an average retailer if you pay cash for these things. Then let's look at what you might pay for the same car and television if you used a more traditional method of financing, like a credit card or a car loan from a bank. Finally, we'll check out what you can expect to pay from an alternative source, like a rent-to-own or buy here, pay here, where the finance charge or interest is built into the weekly or monthly payments. Okay, so our pretty awesome TV is going to cost us $999 at the average giant internet retailer if we pay cash, which might be a little out of reach if we don't have that money already set aside in savings. If we use a credit card with a fairly typical interest rate of 13% to buy this TV, and we make a monthly payment of $140 which is equal to the four weekly payments the rental center requires, we'll pay an extra $46 more than the cash price in interest and have the TV paid off in eight months at a total cost of $1045. Finally, the rental center is offering the same TV for just 104 easy payments of $34.99 each. And whoa! That works out to be $3638.96! What the what!?! Are you kidding me right now? The rental center seriously charges over three times as much for the same exact TV?!? How about our car? Kelley Blue Book (kbb.com) which is a terrific resource for finding information about the prices of new and used cars, says that's the cash price of a 2004 Chevy Monte Carlo LS in good condition should be around $4200. If we get a traditional car loan at an average interest rate of about 3% to buy the Monte Carlo, and we make a monthly payment around $239 a month, we'll have the car paid off in 18 months with the total cost of only about $4300 dollars. A quick stroll through the local buy here, pay here dealers in the area finds the same car with that same $250 monthly payment we talked about earlier, for a price of roughly $6800! The buy here, pay here place charges almost two-thirds more for the same car?!? That's bananas in my book. Yep, it's true. It's actually so much worse. See, it turns out that with either rent to own or buy here, pay here places, if you miss one little payment, they come repossess your stuff. That's right! They just take it, and they're perfectly within their rights to do so. All the money you've already paid toward your stuff may just be gone. Poof. Vanished. You're left with exactly nothing to show for the payments you've made. If the numbers make rent-to-own and buy here, pay here looks so terrible, then why is business booming at these places? Well, there are a few reasons. First and foremost, they make it easy to purchase the things you want if you don't have very good credit or if you don't have very much credit history at all. They take away the hassle of getting more traditional financing, like a credit card or a loan, and they're often located right in your neighborhood, making them the most convenient option. So, what are you supposed to do when you're trying to get started and get some stuff, but you don't have a big old chunk of money just sitting around? Or maybe you don't have the greatest credit because of some past mistakes? Well, you've got a handful of options. If your credit isn't bad, you can apply for a credit card or a loan through your bank or credit union. You might be eligible for a deferred interest plan--those 90 days same-as-cash type deals. Those special financing arrangements can be a sensible way to save money over traditional credit card financing, but you have to be careful. If you don't pay off the entire balance within the same-as-cash period, you will not only be charged interest on the remaining balance, but back interest on the entire amount you borrowed. If your credit's not so terrific, it's usually a good idea to talk to your bank or credit union about a secured credit card. That's a credit card with a low spending limit that is tied to your bank account, so that if you miss a payment, the bank can just take it out of your account. An alternative to using a rental center or buy here, pay here is to seek a personal loan from a family member at a reasonable interest rate. You could also use store layaway or save up to pay cash for the item. It also makes sense throughout the buying decision to consider lower-cost alternatives, such as a smaller television or an older car. Whatever you decide to do, make sure you take a look at all of your options and know upfront what you're really getting yourself into