How to Use Financing Options Responsibly Part 1
If you’re in any personal finance space, you often hear that becoming debt-free is one of the most important goals to have throughout your financial life. While having no debt can be uber beneficial, it’s unfortunately not realistic.
When you’re coming from a low income, financing is sometimes the only option for things like car repairs, medical procedures, or even higher education. That doesn’t mean that it’s bad. It does mean, however, that you need to do your due diligence and make sure you’re using that debt strategically and responsibly. I mean, rich people do that all the time and they’re applauded for it, right? We’re going to do the same thing but on a smaller scale.
There are so many different things that can be financed and each has its own set of pros and cons. Now, I initially figured this would be a one-and-done blog post, but somehow I managed to get almost 2,000 words in and still didn’t include half of what I wanted to include. This is now officially a series and this article will focus on some of the more broad items to be mindful of when it comes to financing.
Check your credit before you let any company run anything.
Annual Credit Report is the ONLY federally recognized credit checking company. Usually, you’re allowed one free check from all three bureaus per year, however, because of covid they’ve expanded that to one per week. Take advantage and check your scores before you finance. This will give you a better idea of where your scores are at, if anything is bringing the score down, and give you a little more confidence with negotiations. It will also help avoid unnecessary hard or soft credit pulls which can lower your score.
It’s also helpful to check your credit semi-regularly so you’re not scrambling to fix things when you need your credit pulled for an emergency, like getting a new car if yours breaks down. It takes hella time for updates to post to your credit. Keeping on top of it regularly helps reduce errors from fuckin up your plans.
Be aware that what your credit score is may not be the number the financing department uses.
Yea, it’s some bullshit. No sugar coating that. What a loan officer for Toyota looks at will be different than what a company like Care Credit will look at. You can always call a business’ financing department and ask what information they use to qualify people. Some places don’t give two shits about that $170 medical bill that’s been sitting there for 5 years. Another will hold it against you. Know the criteria before you apply.
I was not aware of this when my boyfriend and I bought our car. I was ready to slap this sales rep when he showed me my scores were over 100 points LESS than what the credit bureaus had. That can drastically change the financing terms so be aware of what a company looks to make sure you meet that criteria.
Ask if there are promotions or no interest specials.
Care Credit does this often where if you finance over a certain amount, they either offer no interest for a certain length of time or reduced APR rates. Some credit cards will offer an intro year with 0% APR, which means if you need to put down a hefty amount, opening a card with a 0% APR means you aren’t getting charged interest as you work to pay that balance off. You end up paying the loan or credit balance back at face value. This is an easy way to save a few hundred to a few thousand dollars.
Look at the monthly payment.
I know. I’m gunna get hate for this one. Hate away mother fuckers. When you’re low income, looking at what you pay over the course of however many months or years feels abstract. It’s hard to feel what that overall savings is like in your budget. You will, however, feel the impact of the payments right away. Make sure whatever the monthly payment is, you can comfortably make it. Having to finance something is already a risk. Don’t let the pressure to pay the least amount overall or pay something off super fast fuck up your budget right now. You can always refinance. You can always make extra payments. Don’t put yourself in a situation that you can even make the monthly payment.
But you should still be aware of the overall cost.
Here’s a real-life example of why. When my boyfriend and I bought our car, my boyfriend had no credit score and mine was in the 500’s. Our APR was about 13%. Pretty fuckin high. But, we needed transportation and didn’t have much of a choice. We made on-time payments for a year and then looked to refinance. By then our credit scores were closer to the 650-750 range which meant a better interest rate. Our refinance got us a 5% rate which will save us almost $9,000 overall. This is why I said to look at the monthly payment first. By keeping monthly payments manageable, we were able to make on-time payments every month (sometimes a little extra even!) which eventually raised both of our scores enough to qualify for a better rate and save money.
Negotiate now and later.
Nearly everything you finance can be negotiated. I know it doesn’t seem like you have options or even the power to negotiate when you’re low income. You totally can though. Maybe not right away, but as you repay what you borrowed on time, your risk as a borrower gets lower and lower which means companies are more apt to work with you later down the line.
You can negotiate car loans, credit card APR and limits, medical bills, and even furniture purchases. Sales reps want to make the sale. They want the commission. Don’t be afraid to say, “These are my terms. Get there or I walk.”
Know the repayment term.
I’ll use Care Credit as an example again because I’ve had to use their services a few times. A few years ago I fractured a tooth and I didn’t have insurance. It was so fucking painful. I ended up needing a crown (thank god it wasn’t a full root canal) which cost a whopping $1,552. Yes, I remember the exact amount. Because I had no insurance and needed to eat pain-free, I ended up putting the procedure on a Care Credit card. They had a promo of no interest for 12 months. Unfortunately, I assumed that the monthly minimum payment would make it so it would be paid off right at that 12 months. That was not the case. They were literally just showing a minimum payment. It was not enough to pay off the charge within the no-interest period so I had to scramble during the last few months to make it happen. CHECK YOUR TERMS. It can mean the difference between avoiding interest charges or not.
How much of your payment goes to the principal?
Depending on what type of financing you had to do, what you pay every month will not always go towards paying the entire loan down. What is happening is that monthly payment is paying down a portion of the principal (the original loan amount) and the interest charge (what you are paying to have access to that loan or car or whatever.)
Before you sign anything, understand how the interest is applied (meaning are you getting charged the APR for every $100, $200…$1,000 etc. borrowed.) and how much of each payment goes towards the principal.
Always know who holds your debt!
Debt gets sold all the time. Companies merge all the time. One month you may have your car loan with Toyota and the next it’s with a company called DriveTime and no one told you a fucking thing. You need to make sure you know who holds your loan at all times. Keep a record of your payments or download the payment confirmations and save them on your computer. This is especially important for y’alls with student loans that keep changing lenders. Companies want your money. They will “conveniently” have issues transferring data which can show as missed payments or late payments on your credit. Document everything so if a company happens to be bought out while you’re halfway through paying the bill off you have the evidence to back up those “clerical errors.”
This is just the basics
Like I mentioned earlier, I wanted to include everything in one post, but it just wasn’t going to happen. On top of these points, certain industries have their own set of things to be aware of. The more informed we are when we take on debt, the better chance we have of turning that debt into something beneficial. Something that doesn’t eat up all our income and push us further from our goals.
For many of us low-income folks, predatory debt is literally the thing that puts us on the credit map so to speak. No shame at all. The system is rigged and we, unfortunately, have to play that game to get ahead. The good thing is that we can be smarter than those predatory loans and use them as a catalyst to secure so many things.
Next post I’ll cover how to buy a car without letting the sales rep trample over your budget or your goals.
Also thank you to everyone that responded on IG and Twitter with their tips!
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