debt

Interest rate sinking borrower

Don Taylorq_v2.gifDear Dr. Don,
In my desperation to pay the bills, I took out a high-interest loan with a company. The loan is for $2,000 at an annual rate of 89 percent, with payments of $130.87 biweekly (a total of 22 payments). The total of the 22 payments is $2,879.22.

To lower some of the finance charge, I pay $400 biweekly. After five payments at a yearly rate of 89 percent, how much should I owe? Not only am I not sure, but neither are they. I was told $400-plus, but no way could that be correct. They correspond by fax and phone only. They told me that they are controlled by the "Commonwealth of the Bahamas" and that is where they are located.

These kinds of loans, along with payday loans, make it so easy. No credit checks. Cash on demand. When someone needs money now for groceries, gas, prescriptions or Chicago's horrible parking tickets that will double after two weeks, they make it too easy. I don't know which is the bigger problem -- the loan sharks or the mayor of Chicago.

As for the banks and credit unions, they take forever and act as though you are not a customer with a perfect payment record with them, but a charity case. No one ever gave me a billion-dollar bailout. By the way, they could not answer my question about the finance charge or the question about where do millionaires keep their money if the banks and credit unions only insure up to $200,000. Help!
-- Ginger Gadfly

a_v2.gifDear Ginger,
I can help you with the amortization schedule on the debt. After five payments of $400, you should have a payoff balance of $224.87, as shown in the table below:

Debt amortization schedule
Payment numberBeginning balanceBiweekly interest rateInterest expenseRequired paymentPayment plus additional principalPrincipal pay downEnding balance
1$2,0003.423%$68.46$130.87$400$331.54$1,668.46
2$1,668.463.423%$57.11$130.87$400$342.89$1,325.57
3$1,325.573.423%$45.38$130.87$400$354.62$970.95
4$970.953.423%$33.24$130.87$400$366.76$604.19
5$604.193.423%$20.68$130.87$400$379.32$224.87
6$224.873.423%$7.70$130.87$232.57224.87-

Digging yourself out of a hole while paying 89 percent annual interest is an uphill battle, to say the least. Keep in mind that the loan didn't pay off your bills, it merely consolidated these debts. If you can afford to pay $800 per month in loan and additional principal payments, it makes me wonder why you were forced into this high-interest, short-term loan.

I can't comment on Chicago's parking problems, or about its mayor providing a financial incentive for people to quickly pay a parking ticket. But in general, parking tickets are avoidable. Complaining about avoidable expenses doesn't engender much sympathy.

Lenders argue that high-interest payday loans and loans like the type you got are beneficial to consumers because they allow them to stay current on their other loans and preserve their credit scores. The ideal, however, would be to avoid living paycheck to paycheck, where one financial setback has you knocking on these lenders' doors. Paying these high rates keeps you from living within your means.

Millionaires tend to invest rather than save, so most don't keep their wealth in bank savings accounts. If they did, they could take advantage of programs like the Certificate of Deposit Account Registry Service, or CDARS, that allow investments of up to $50 million to be FDIC-insured.

Bankrate's content, including the guidance of its advice-and-expert columns and this Web site, is intended only to assist you with financial decisions. The content is broad in scope and does not consider your personal financial situation. Bankrate recommends that you seek the advice of advisers who are fully aware of your individual circumstances before making any final decisions or implementing any financial strategy. Please remember that your use of this Web site is governed by Bankrate's Terms of Use.

Read more Dr. Don columns for additional personal finance advice. To ask a question of Dr. Don, go to the "Ask the Experts" page, and select one of these topics: "Financing a home," "Saving & Investing" or "Money."

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