How to spot a debt trap
Debt accumulates very quickly and can easily become an overwhelming burden, if you are in trouble we can help.
Debt Trap #1: Payday Loans

These loans are basically very expensive credit. Say you need to borrow 100$ and plan to return them before the payday. In two weeks you have to repay 160$, or you pay another fee to extend the loan another month. So if you roll the loan over two times, that's 2 x $60, and you've paid $120 to borrow $100! That's an annual percentage rate of 720%!
Payday Loans are likely the worst debt trap of them all. Most of them roll into a second loan, and then a third. It's better to pay late or default on other, lower-interest debt than to take out a payday loan.

Debt Trap #2: Credit Cards

Credit cards are a double-edged sword. In other words, they can be very helpful when you need cash, but if you don't manage your accounts wisely, credit cards can make your financial situation a lot worse. Here's how:

Fees can be exorbitant:

  • Late payment fees-If your payment is even one day late, you may be subject to a late fee of $20 or more.
  • Over-the-limit fees-If you go over your credit limit by even one dollar, you may be subject to a fee.
  • Cash advance fees-Most companies charge from 2%-4% of the amount advanced, with no maximum amount.
  • Balance transfer fees-Some creditors charge as much as 5% when you transfer the balance from another card. That's a $30 fee on a $600 transfer. So if your intention is to lower your interest rate, you may not achieve your goal when you consider the fee involved.
  • Annual fees: Some cards have annual fees as much as $400. That's a lot to pay for the convenience of using a credit card, especially when there are plentiful no annual fee cards available.
Sudden changes to your credit agreement can be very costly:

  • Rate increases for late payments-On some accounts, a late payment of even one day triggers an increase in the interest rate of the account. Some accounts that begin at 9% can instantly rise to as much as 29.99%!
  • Default rate increases-Some creditors will raise your rate if you have been delinquent on any other credit accounts! They regularly monitor your credit report, and if you've been late on any accounts, they'll penalize you

TIPS: Read all credit card agreements thoroughly; and make all payments on time, or even a few days early. Useful resources are the Pay Off Credit Card, Credit Card Optimizer and Personal Finance calculators.

Debt Trap #3: Pawnshop loans

These are usually small, short-term loans intended to be quick fixes for those in a financial bind:

  • Their terms are one to four months, secured by: some piece of property of yours (collateral).
  • You only get half of the item's resale value.
  • Interest can range from 5% to 100% per month, and the loan period can range from 30 to 60 days.
  • If you don't repay by the agreed date, your property will be sold.
Debt Trap #4: Rent to own

These companies allow you to buy appliances, furniture, and even computers, through a weekly rental payment plan. The two major problems are:

  • When you add up the weekly payments, you will always be paying several times more than the fair market value of whatever you're renting!
  • If you miss a payment, the store will take the merchandise back, no matter how much you've already paid for it.
In the age of Carousell and Ebay, furniture, electronics and appliances can now all be bought at a fraction of their retail price. If you don't have the money to buy something outright, consider purchasing it used before signing up for rent-to-own.

Let's recap

In this article, we've discussed debt traps: Products and services available to help individuals experiencing financial problems, but that often make those problems worse:

  • Credit cards can be very helpful but should be used with caution. The best way to avoid debt traps is to know exactly what your terms are by reading your agreement thoroughly, and to pay your bills on time.
  • Overdraft protection programs can be helpful as well; but they are never free, and they can send you further into debt. Again, read your agreement thoroughly and make sure you repay your overdraft amount immediately to minimize fees.
  • Steer clear from high-interest loans such as payday loans, car title loans, pawnshop loans, renting-to-own, and income tax refund loan

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