Ask Dr. Per Cap
Ask Dr. Per Cap is a program funded by First Nations Development Institute with assistance from the FINRA Investor Education Foundation. Nimiipuu Community Development is happy to share this column as partner with Native Financial Learning Network funded by Northwest Area Foundation.
Dear Dr. Per Cap:
I just bought a couch at Wayfair using Wayfair Financing – payments are $35 a month for 18 months which adds up to about $100 in interest. It reminds me of layaway that my folks used when I was a kid. Only I don’t have to wait because they’re shipping my couch right away! Is this a smart way to buy stuff?
Signed, Couch Potato
Dear Couch Potato
Like a lot of questions in finance – it depends. Wayfair Financing is a type of credit called a point-of-sale loan. It’s a financial product that’s been around for a while but we’re seeing them advertised a lot more lately, especially at online store checkouts. I relate to your memories of layaway. I still remember that BMX bike my grandma put on layaway for me at K-mart when I was ten. What a ride! However, point-of-sale loans are not layaway.
For one they are installment loans with fixed payments for a specific period of time or term. Layaway was just an agreement that a store would hold your merchandise for a month or two while you made payments. Layaway was also mostly used to purchase big ticket items like TV’s, appliances, and furniture. But point-of sale loans are common for merchandise under $100.
Many online stores advertise point-of-sale financing. Wayfair currently partners with four companies: Affirm, Fortiva, Genesis Credit, and Katapult formerly known as Zibby to offer customers point-of-sale financing. But there are other financial technology or fintech firms offering similar loans. What’s tricky is they all structure their products differently.
For example some companies check credit before approving a loan while others look at non-traditional lending history – like Affirm which might review a person’s bank account balance.
Afterpay, which is used by stores like Urban Outfitters and Forever 21, doesn’t charge interest to qualified borrowers; while other point-of-sale lenders charge interest based on creditworthiness.
Then you’ve got Katapult which calls their product a lease-to-own payment option and charges a $45 fee upfront and no interest if paid in full within 90 days.
Point-of-sale financing can appeal to folks who can’t qualify for a credit card. Moreover, some people actually prefer point-of-sale financing to credit cards because interest rates are sometimes lower and a borrower will usually know upfront how much they will pay in total.
However, point-of-sale financing has drawbacks too. Loans that aren’t paid off might show up as delinquencies on a credit report prompting debt collectors to get involved. Yikes! Moreover, late fees can apply to missed payments which add up.
Here’s another issue – what happens if you need to return an item before a point-of-sale loan has been paid off? When using a credit card the Truth in Lending Act (TILA) provides chargeback rights so a borrower is entitled to a refund. Unfortunately TILA doesn’t apply to point-of sale financing so refunds might be problematic.
So as with any financial product, do a little homework and consider all your options before agreeing to point-of-sale financing. Savvy shopping!
Working Toward Financial Independence
Welcome to Ask Dr. Per Cap, a financial advice column to help you travel on the winding roads toward financial independence. I will draw upon my experiences – some good, some bad! – to help you learn skills, tricks and strategies to take control of your financial future. And if we succeed, well, hopefully you won’t make the same mistakes I did because you’ll know better.
I’ve had a handful of great teachers in my life, and not all were school teachers. I met one of my best when I was 19 – Pete, the boyfriend of my older sister. Pete taught me many valuable lessons, but perhaps the most important was his unique view of the world that he called the long line and the short line.
“Some people see colors. I see lines.” This was Pete’s reply when I once told him I was tired of always struggling to make my monthly rent and asked how was it that he never seemed to worry about money.
“At first glance, I don’t notice a person’s race or skin color. I also don’t pay attention to what type of job they have, whether they have a college degree, or the car they drive. I could care less about any of that stuff,” Pete continued. “What I see instead are two types of people standing in two different lines. The first line is dreadfully long. It stretches for miles, twisting and turning, packed with people. For whatever reason, most people are standing in this line and many are frustrated, unfulfilled, or bored because they are stuck waiting. They’re waiting for a paycheck, waiting for a job interview, waiting for a break, or just waiting for a change. You name it and they’re waiting for it. This long line barely moves because of all the people, many of whom will never get what they’re waiting for or, if so, not for a very, very long time.
“But the other line I see is much shorter and without so many people. It moves quickly with a lot fewer hassles and delays. The people are more relaxed and at ease than the long liners. They’re smiling and in good moods, and some are even laughing. It’s almost as if they are breezing through life. The reason is that these people know how to manage their money better than the people in the long line. They also have a knack for getting around hurdles and avoiding setbacks. Some are born with this knowledge; others develop it over time. But whatever their backgrounds, short liners have the ability to overcome financial challenges. And whether it’s getting a good deal on a car, handling an insurance claim, paying off a loan, or even starting a business, these folks have figured out how to come out on top financially.”
So let me ask you the same question Pete asked me that day: Which line are you in? If you’re like I was, you’re probably waiting in the long line. If so, don’t feel discouraged because my goal is to get you into that short line. It doesn’t matter how much money you have at this moment, what your credit score is, what kind of job you have, or how old you are. It doesn’t matter, because more than anything else, getting ahead financially is about creating an attitude, a mindset that allows you to see opportunities when others see obstacles. I haven’t always been in the short line, but I changed my attitude and learned some skills to get out of the long line, and so can you. In the coming months I’ll answer your questions on a wide range of financial topics and related issues that I think will make you look at the world in a whole new way and get you started on the path to financial wellness.
So ask yourself: Are you ready for the short line?
Dear Dr. Per Cap: I live in Idaho and the other day I got a call from someone who told me the United States Treasury is offering special grants to Native Americans. When I asked how to apply the caller told me I needed to pay a fee. And get this: He wanted payment in the form of iTunes cards! It sounded really shady so I hung up. What gives?
Signed, Suspicious Native Lady
Dear Suspicious Native Lady,
You were smart to hang up! The phone call you received is a new scam targeted to Indian Country and I’ve personally spoken to folks in both South Dakota and Idaho who’ve gotten the same call. It’s malicious, it’s shameful, it’s an invasion of privacy, and it’s SO not cool. What’s even scarier is that whoever is perpetrating this outrageous fraud has somehow gotten ahold of contact info for Native people just like you. And yeah, iTunes cards, really?
One person I talked to was instructed to purchase $1,600 worth of iTunes credits online and then give the caller the confirmation numbers. Poor guy did just that and never heard from the caller again or received his so-called “grant.” Truth is, the federal government never randomly calls individual Native Americans, or anyone for that matter, and offers them a grant. Don’t we all wish that were true! Another reason this scam can be convincing is that the call comes from a Washington DC area code. But creating a fake area code that registers on your caller ID is known as “spoofing” and it’s quite common with scams coming from overseas.
As for the contact info – we live in the digital age now and the privacy we once knew has pretty much gone the way of standard transmissions and steel coke cans. It doesn’t take much effort for a scammer to snoop around on Facebook or some other social media channel to find out your hometown, employer, tribal affiliation, names and photos of friends and relatives, or the name of that awesome frybread stand at last week’s rodeo. So please, please be careful with what you post online about yourself and others.
And if you get another sketchy call from someone offering easy money, a free trip, or anything else that sounds too good to be true, tell ‘em you make money the old fashioned way – at a 50-50 fundraiser where your cousin’s in charge of the raffle tickets!
Dear Dr. Per Cap: I just bought a new war pony. It’s a nice vehicle but last week when I traded in my old ride the car dealer told me that I was “upside down” on my loan and would need a new loan for more than the cost of the new car. That seemed ridiculous but I really needed a new ride. So, what gives? And what does it mean to be “upside down” on a car loan?
Signed, Confused and Frustrated
Dear Confused and Frustrated:
Ok, your dilemma is pretty common these days, and unfortunately it all goes back to when you bought that war pony you just traded in. Here’s an example to put things in perspective. Let’s say a person wants to buy a vehicle that costs $31,000 (the average price for a new car in the U.S. according to TrueCar.com…….yikes!). However, he only has $5,000 to put down so he needs a $26,000 loan to make up the difference. Now let’s say the buyer is in his early twenties, carries high credit card balances, or has other issues that hurt his credit. The dealer, or whoever it is that he’s applying to for a loan, considers him a riskier borrower and the best interest rate he can offer is 13%. Now, for most folks a sensible car loan should have an interest rate of 8% or less. And it shouldn’t be for much longer than 3 years or 36 months. But this guy is stuck with a 13% interest rate and with a 3-year mortgage, that would mean a Godzilla-sized monthly payment of $876, which is more than most people are willing to pay each month. So the easiest way to lower that payment without buying a cheaper car is to extend the life of the loan, to, let’s say, six years or 72 months. This now spreads the payments over more years and lowers the monthly payment to a more affordable $521 per month. The buyer can now afford the car, and everyone goes home happy, right?
Wrong! The problem is that the buyer is now paying a lot more for the loan because even though his monthly payment is less, he’s making twice as many payments. In fact, as the chart below shows, the cost of credit (the amount paid for interest in addition to the original $26,000 borrowed) after 6 years is more than $11,500! Hey, that’s enough to buy a good used car…..hint, hint.
3 years or 36 months Loan Term
13% Interest Rate
$876 Monthly Payment
TOTAL COST OF LOAN $31,536
TOTAL COST OF INTEREST ON LOAN $5,536
6 years or 72 months Loan Term
$521 Monthly Payment
TOTAL COST OF LOAN $37,512
TOTAL COST OF INTEREST ON LOAN $11,512
Now think about how much a car will depreciate, or lose value over the length of the loan. Miles driven, every day wear and tear, and other factors cause most new vehicles to lose about half of their value in the first five years. In fact, it’s not uncommon when a borrower makes a small down payment (less than 25% of the purchase price) on a high interest, long-term auto loan that the car can actually depreciate faster than you can pay it off. So the car can lose value faster than you can pay down the loan – and this is especially true if you put a lot of miles on the car each year. So that is what it means to be “upside down” on a loan: You owe more on the car than it’s worth.
And in your case, because your old war pony was worth less than the amount you owed on it, the dealer simply tacked that outstanding loan balance onto your new loan, leaving you with an even bigger loan. It also meant that you had no equity, or value, left in the old vehicle so when you traded it in, you didn’t get any extra money for the down payment on the new purchase. A tough break, one that makes you miss simpler days when war ponies ran on hay instead of gasoline.
So how can you avoid being “upside down” on your next car loan? Here are some tips:
Pay at least 25% of the purchase price of the vehicle up front when you buy it.
Try to avoid car loans any longer than 3 years or 36 months (but up to 5 years is ok).
Push for the lowest interest rate possible – 8% or less is ideal. And shop around to find the best deal!
Don’t let your monthly car payment and cost of insurance exceed 25% of your total monthly income.
Take good care of your vehicle – try to drive fewer than 12,000 miles a year and keep up with scheduled maintenance and repairs.
Follow these five simple steps and I guarantee you’ll never be “upside down” on a loan again. I understand this might mean you’ll have to purchase a more modest war pony than you had hoped for, but who cares? It’s the person driving the car that counts, not the other way around!
Dear Dr. Per Cap: Last month, after 30 long years, my husband and I finally made the final mortgage payment on our home. We’re thrilled to no longer have a monthly mortgage payment and look forward to saving some extra money for a much needed vacation. But now my husband thinks that because we are no longer required to have homeowner’s insurance, we can save even more money by dropping the coverage. Is this a smart move?
Signed, a Proud Homeowner
Dear Proud Homeowner:
That’s great news about paying off your mortgage! So happy to hear you and your husband finally own your home free and clear. I’m also glad you will be able to save some extra money now that the burden of a monthly mortgage payment is gone. But dropping your homeowners insurance is not, I repeat not, a smart move. Here’s why.
Regardless of who owns your home, you or the bank, the risk of losing your home due to fire, vandalism, or certain acts of nature is always present. So in the unfortunate event that your house burns down, a good homeowner’s policy will pay out the value of your home so you can rebuild or purchase a new home. A mortgage company will always require a borrower to have homeowner’s insurance because it has a vested interest in the property. But that motivation is to protect its interest, not yours. When a homeowner finally pays the mortgage off, the company could care less whether or not the home is insured, because it no longer has a financial interest in the property. But you and your husband sure do. And it would be a shame to lose the home you’ve worked so hard for and not have it insured. Sadly, I’ve seen uninsured homes on the rez destroyed by fire, especially some of the older tribal homes that have long since been paid off, or even homes that people have built themselves without ever having a mortgage. Believe me, it’s not a pretty sight.
I think sometimes people also just don’t understand how important insurance is because it’s not something we think about every day. Whether we’re talking auto, homeowner’s, life, or health insurance – you name it – it often gets forgotten. But it’s another financial product just like a credit card or a bank account, and it protects individuals and families against various risks they face throughout their lives. Moreover, homeowner’s insurance is really cheap compared to other types of insurance, such as auto insurance. It’s also easy to purchase regardless of whether you live in the city or on tribal land, and is readily available from a wide range of insurance companies. So do yourself and your family a big favor and keep your homeowner’s insurance policy. And, oh yeah, enjoy that well-deserved vacation!