(Note: This post is part of an on-going series on financial literacy. Two of the goals of Prosper Waco have to do with accumulating wealth: (1) Reduce the percentage of Waco-area households living without three months’ worth of savings if they were not able to work. (2) More than 50 percent of Waco households will have a net worth above $15,000. Our hope is that this series will help move our community towards accomplishing these goals both by sharing information about some of the challenges, complexities and practicalities of managing finances. For other posts in this series, click here: Financial Freedom. — ABT)
By Phil Oliver
Payday and Title Loans
As I shared in my last blog, I have spent many hours talking to individuals and households about honestly addressing their financial goals based on their money flow IN and the flow OUT. In my Financial Coaching, I am finding more and more cases where the short-term allure and convenience of quick (expensive) loans ended up becoming a major source of debt and despair. The complete cycle is more devastating as the flow slows. Medical bills or medicine, sickness or even car repairs, all become major setbacks in any household that basically operates from paycheck to paycheck. This is where many of the financially vulnerable turn to the predatory loan network.
Payday Loans and Title Loans are short-term (usually two week) contracts that require an upfront fee that must be paid back IN FULL in two weeks. The lenders are very willing to arrange for the “convenience” of a direct withdrawal from the consumer’s checking or debit account on payday (That’s why they are called “Payday Loans.”) More often than not, this arrangement results in additional fees and frustrations as the money needed to pay IN FULL is not available two weeks later. To make matters worse, consumers are sometimes also hit with insufficient funds or overdraft fees from their banks on top of the fees already paid for the loan. The larger the loan, the less likely the customer will be able to pay it off in the short term. When that happens, the payday lender often encourages the borrower to start another short term loan with additional fees! Most who borrow, WON’T have the money to pay off the loan in two weeks when it is due, and the cycle develops into devastating debt where eventually payments never chip into the principle at all, and interest mounts exponentially. In the case of an Auto Title loan, the period could be a month, but then thousands of dollars will be due in 30 days. In my coaching meetings, I have found this happening across the city in alarming frequency.
Since my last blog, the City of Waco has passed a Payday Lending ordinance which will go into effect on Sept. 1. This is AWESOME news for consumers in crisis! Now the lending institutions will be held to a reasonable standard of high interest and number of renewals of the loan. They will also be tasked with making sure the loan is not a crippling percentage of the customer’s take home pay. There will be grievance procedures in place for residents to file when lending institutions don’t follow the ordinance.
For more information on this important topic, I HIGHLY recommend contacting The Waco Citizens for Responsible Lending. And keep an eye out for an upcoming “Predatory Lending Training and Update. ” This session will include roundtable discussions concerning predatory lending updates at the federal, state, and local level as well as steps to get involved in your community. Special guest speakers will include Ann Baddour, Director of the Fair Financial Services Project at Texas Appleseed as well as staff from the City of Waco. For more information about Waco Citizens for Responsible Lending, or to get on the list to receive information about the “update” when it is scheduled, please contact Meilana Charles at 254-757-5180 email [email protected] or Tiffany Fry at 254-753-7337 email [email protected]
My biggest shift in the last few years with all those I talk with is to emphasize a common investment phrase…. “Return On Investment (ROI).” In regard to a college education, I highly recommend most high school students attend MCC or TSTC to start their studies for ANY degree or certification. These institutions provide a seamless path to job security through an associate’s degree or 4- year college by transfer or at MCC under the University Center opportunity. This combined with dual-credit classes in high school can allow residents to fully enter the job market or an undergraduate degree much more rapidly and with minimal debt.
It is not unusual now for graduates to build up a $40-60,000 student debt while earning an undergraduate degree. This often means up to 20-30% of their take-home pay is committed for long-term debt repayment. This is a huge issue especially when combined with housing costs which can require an additional 40-50% of take home pay. If you add that up, it means that there is only 20-40% left for ALL other living expenses!!
This is where the concept of Return on Investment (ROI) becomes so important. It is financially smart to think carefully about the ROI when planning for college and career. Of course it’s important to consider passion, talents and general interest – adding some consideration of average starting salaries and job availabilities rounds out a healthy equation for financial freedom. In most cases, there are many choices for career paths that are possible that use similar skill sets and training. Most college advisors and high school counselors can offer information for future job salaries, demand data, and trends.
Another consideration to reduce college debt, is the ability to transfer as many credits as possible from the community college. One of the best opportunities here in our area is the MCC University Center program. It allows residents to dually enroll in MCC and a partnering 4-year University while staying in Waco and paying much reduced hourly tuition. It also guarantees the acceptance of credits earned at MCC and puts NO LIMIT on the cumulative number of transfer hours!! Considering that most 4-yr Universities will only allow up to 60 hours to transfer toward a degree, having no limit for transfer hours with partnering Universities could allow any student to actually transfer in as a senior!! This is a HUGE consideration when it comes to debt!
To find out more of about this unique program go to http://uc.mclennan.edu.
We are blessed to have some great resources in our Waco community for growing financially healthy. Our area is also fairly unique in the amount of networking and collaboration being practiced, especially through the new and expanding Prosper Waco initiative. I have been actively involved in this amazing collective and see the growing influence and investment they are creating for our community. Please check out their website and resources at prosperwaco.org, as well as the recommended FREE, foundational curriculum adopted by Prosper Waco for financial training from the Dallas Federal Reserve Bank called “Building Wealth”. That material is available for a FREE download at https://www.dallasfed.org/assets/documents/cd/wealth/wealth.pdf
In my next blog, we’ll look at the 3 main financial ways that deficits in a monthly flow can be addressed and brought into balance. If you have any questions, please feel free to e-mail me directly: [email protected]
Phil Oliver is a retired educator. He is an independent Financial Coach, active mentor, and community activist. He has spent the last 8 years empowering individuals and families to take charge of their finances through his FLOW system. He is active in many community efforts to grow financial literacy and responsibility including Prosper Waco and Citizens for Responsible Lending. He consults with many local organizations to teach and inspire their efforts to empower clients in personal finances. You can contact him at: [email protected]