Visualization of payday loans

Hi all.

As in the last post about rent to own, this post will explain payday loans without the jargon.

Say you have a deal with a friend lending him $100 for 2 weeks, if he pays you 15 dollars now (a fee). If he continues this for a whole year, he will have borrowed $2,600,  but he would have paid you 390 dollars in total in the fee.

If you got paid 15 dollars each 2 weeks for 100 years, you would get $39,000.  That is a lot of extra money.

Over the life of the loan, each day your friend would only pay you $20 for the $100 you lent him, but he would pay $30 in extra money.

A clear visualization of rent to own.

Hi all.

As with the previous post on what a credit card loan looks like, I will give you an explanation of rent to own without the jargon.

Imagine that you rent your laptop valued $2,000 to your friend, who I’ll call Mike, at 40 dollars per week.  He must pay you that each week, or he will lose the laptop. If he pays it off, he gets your laptop.

How many weeks will it take for Mike to pay off the loan? $2,000 / $40 = 50 weeks.

Imagine that you have 5 other friends you have the same deal with. How much money do you get in a week, given that there are 6 people you have the same deal with? 30 dollars.

Now, for Mike’s individual loan, let’s see how much money you get from the deal. You effectively get 104 dollars out of each 100 dollars that he gives you. He pays you only 80 cents per week for the laptop, coming up to a total of 40 dollars over the life of the loan. You get an extra $1,960!

Clear visualization of credit card loans

Hi all.

I explained about credit card loans. I will give you a way to visualize them, by turning them on their head.

Imagine you are loaning $200 to your friend, who I’ll call Mike, at 20 percent interest compounded monthly. You allow him to pay it off at any time he wants, and to get more money from you.

This means that each month, he should pay you about 4 dollars. 4 dollars from one person is not a lot. But say you have the same amount being borrowed by 2 thousand other people. The total loan amount? $400,000. The minimum payment on this per person? Still 4 dollars each month.

Now, let’s say that you decrease the interest rate by 10 percent, but increase the loan amount by a number that still allows you to get an average minimum payment of 4 dollars per month. What is this loan amount? About 122 dollars!

What about the reverse? (Decreasing the loan amount by $100) The new interest rate would be about 50 percent!

Isn’t it shocking when you think of it in another way?

What is a credit card?

Hi all.

A credit card is a loan. You are borrowing money from a credit card company. Loans aren’t free money!

Let’s create an imaginary credit card, at 20 percent annual interest and buy a 200 dollar item with it. There will be a 30 day billing cycle.

The balance is $200. You owe $200. You have to repay this, plus a finance charge.

What is the finance charge on the balance? Finance charge = Average daily balance * APR * Number of days in billing cycle / 365 days in a year

What is the average daily balance? Average daily balance = (Balance on day 1 + … + Balance on day N) / Number of days in billing cycle

Assuming that we don’t repay this loan at all during the month, the finance charge is:

Average daily balance = $200 * 30 days not repaid / 30 = $200

Finance charge =  $200 * 0.20 * 30 / 365 = $3.29

So you must repay $200 plus $3.29. Sound small?

Well, let’s pretend that you do not repay the loan at all for 43 months (3 years and 7 months). The accumulating finance charge will be close to $141.47 ($3.29 x 43 months).

The minimum payment

There is a certain percentage that credit cards require in payment, which is pretty small. Let’s calculate it for our imaginary $200 debt:

200*x = 3.29

x = 3.29/200

x = 0.01645

The minimum payment on this balance is 2 percent.

If we paid 2 percent on $203.29, the balance would go down by $4.07, but it would be offset by $3.34 of finance charges. So the balance next month would be:  $202.56. So effectively it has gone down by 73 cents! Some credit cards have an exact minimum payment also attached, looking like: The greater of 3% of the balance or 30 dollars. Even if 30 dollars is greater than 3 percent of the balance, the 30 dollars is eaten up by finance charges in about a year, assuming that the loan is not repaid by then.

Paying it off “early”

Maybe you’ve never realized that you can pay off your credit card loan earlier in the month. This results in a lower finance charge. Huh? Let’s try it out.

Using our imaginary $200 loan, let’s pretend we make a $50 payment every 5 days, stopping the third week.

Visualization:

Day 1 to 4 – $200

Day 5 to day 9 – $150

Day 10 to day 14 – $100

Day 15 to day 30 – $100

Let’s determine the finance charge:

Average daily balance = ($200 *  4 days) + ($150 * 4 days) + ($100 * 15 days) / 30 days = $800 + $600 + $1500 / 30 days = $2900 / 30 =  $96.67

Finance charge = $96.67 * 0.20 * 30 / 365 = $1.59

We have saved $1.70 by paying $50 every 5 days. This can add up to a lot of money over many years.

The lesson here? Credit cards are not a very good way to go if you cannot repay the loan at the end of the month, and/or every few days.

“Hearing Impaired”

Hi all.

The title of this post is the phrase “Hearing Impaired”, a word which drives me absolutely crazy.

What if I called you wheelchair impaired because you could walk?

What if I called you sanely impaired because you thought slowly?

What if I called you reading impaired because you read slowly?

You wouldn’t like me to call you these words, right?

So, please don’t call me or any other deaf person (whether or not they know ASL) “hearing impaired”. The phrases above that I could’ve called you are so degrading that you would feel berated.

Thank you.

- Kyle