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Not that they need more encouragement, but Americans are increasingly
being tempted to get and stay in debt.
Some of the most recent enticements come from longer-term car loans and
from credit card reward programs that are good only if you carry a
balance.
Although marketed as attractive deals for a specific type of consumer,
these offers can carry a hefty price tag in interest charges.
In the case of car loans, a growing number of bank lenders and car
manufacturers are targeting consumers eager to drive a "high-end"
vehicle -- like a sports utility vehicle selling for $30,000 or more --
but who can't afford the monthly payments on a typical three-year to
four-year loan.
The solution? Loans that last six, seven or even eight years, lowering
the monthly payments. The downside? You may still be making payments
after the vehicle stops running, and your interest rate and total
interest costs will be higher.
"It is really a ploy to get people to buy something they can't afford,"
said Jessica Cecere, president of Consumer Credit Counseling Service for
Palm Beach County and Florida's Treasure Coast. And with an eight-year
loan, "you are going to be making repair payments along with car
payments," Cecere said.
Although still relatively rare, industry observers expect that
eight-year loans will account for 2 percent of all car loans this year,
with the number increasing over the years.
The lure, obviously, is the lower monthly payment. On a $20,000 loan,
the usual minimum amount financed with an 8-year loan, you would pay
$272.67 a month based on an interest rate of 7 percent. By contrast, a
$20,000 loan over three years at a lower 6.5 percent interest rate would
result in a higher monthly payment of $612.98.
But with the eight-year loan, you would end up paying a total of $26,176
including $6,176 in interest. With a three-year loan your payments would
add up to $22,067, including $2,067 in interest.
Total savings over the eight-year loan: $4,109.
So instead of determining how much car you can afford based on the
monthly payment, "decide how much you are willing to pay in total,"
including interest, Cecere said. If necessary, shop for a less expensive
car rather than extend the length of the loan.
Other deals that appear attractive at first but turn out to be lemons
are credit card reward programs that kick in only when you don't pay
your balance in full -- a self-destructive habit afflicting an estimated
61 percent of card users in the United States.
With cards that offer these rewards charging interest rates as high as
17 percent, any reward you get -- cash rebates or points toward
purchases -- is going to be more than eaten up by the interest charges.
While such questionable reward programs have been around for years, they
have mushroomed in recent months. Marketers attempt to justify them by
claiming they are designed to serve card users who would carry a balance
anyway, even if no reward were offered.
But I find it unconscionable that some of the sales pitches are aimed at
college students and other first-time credit users, in effect
encouraging them to get into the habit of not paying their bills in
full.
"We should never," Cecere said, "encourage people to get in debt and
stay there."
And we know what that habit can lead to: On average, each of the
estimated 51 million American households that carry a balance on their
credit cards owes nearly $12,000, according to industry figures.
Such a staggering debt pushes many of them into the "minimum payment
trap" -- just sending the required minimum payment on their cards each
month -- while interest continues to pile up on the unpaid balance.
"As credit card interest rates are often quite high, consumers need to
take charge of the situation and pay as much of their card balance as
they can afford," said Howard Herman, a consumer affairs specialist with
the Federal Deposit Insurance Corporation. "The amount you pay toward
your credit card bill each month can have greater long-term consequences
for your finances than how much money you save or invest."
Here is an example, provided by the FDIC: If you owe $5,000 on your
credit card, get charged 18 percent interest and make only the minimum
payment of 2 percent each month, it will take 46 years and $13,926 in
interest charges before the $5,000 balance is paid off. No reward
program a credit card has ever offered can make up for that.
-Humberto Cruz
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