How Installment Loans Can Help You Avoid the Broke Tax
February 6, 2018 | By Emma Frost
If you're part of the workforce in 2019, chances are you're overworked, underpaid, underemployed, or some combination thereof.
Employment rates are up, and new job creation seems to be trending at a steady increase; the Motley Fool even reports that 75% of Americans think they’ll be better off in 2019. But with growing inflation, and stagnating minimum wages, many may still find themselves struggling just to keep up.
Whether it’s a lower tax return check, the lifestyle creep, or an unexpected emergency, CNBC News estimated that over 55 million Americans have little to no savings and has observed that millennials are increasingly finding themselves with more debt than savings.
How Can Installment Loans Help You Avoid the Penalties of the Broke Tax?
The broke tax isn’t so much a real-life tax on your lack of cash as it is the compounded and cascading effect that being tapped out has on your finances. And if you’re one of those 55 million, chances are you know just how expensive being broke can really be. Can a installment loan help you? Let's investigate.
The Real Cost of the Broke Tax
Not having the money you need when you actually need it can, not only derail your short-term financial goals but set you further and further back on your long-term life goals as well. It could mean ditching a promising internship because it's unpaid, taking out a car loan with long terms that amount to higher interest over time, or pushing back a big expense like a new house or even a new addition to your family.
Between late fees, higher interest rates, and overdraft charges, (not to mention hits to your actual credit score) this could mean digging yourself further into the financial pitfall of the paycheck-to-paycheck cycle with each missed payment or purchase you couldn’t really afford.
Beating the Broke Tax
But how do you escape the yoke of the broke tax? We’ve written before about how installment loans can help if you’re short on cash when an unexpected emergency arises, but did you know they might also be cheaper than biting the bullet when it comes to the broke tax?
Yes, you read this right - installment loans could be a cheaper alternative to checking account fees or even prepaid debit cards in most cases, especially if you know the money is coming in and just hasn’t hit your bank account yet.
How the Odds Are Against YouA study conducted by the consulting firm Bretton Woods Inc. revealed that banks realize that their middle-income customers are also their biggest sources of revenue when it comes to the fees they incur. And that’s what they bank on (pun intended).
When you combine that with less-than-savory “overdraft protection” programs and practices, (that leave much to be desired and that can be applied to your account without your permission) this can make for a precarious situation for busy households with very active checking accounts, but a profitable one for banks.
If you factor in the fact that over 50% of all banks can also determine the order in which checks are cleared, resulting in multiple overdraft fees, sufferers of the broke tax may find that this “protection” isn’t all it’s cracked up to be. But the first step to fixing a problem is simply seeing that it’s there.
So, now that you know a little bit about how the odds are stack against you as an account holder, here are some startling statistics about how much it actually costs you and Americans like you every year in bank fees and penalties.
Cold Hard Facts on How Banks Get Your Hard-Earned Cash
Facts About Fees
When you get charged for insufficient funds, that represents big bucks for banks and credit unions:
- A staggering 90% of all bank fees are checking account overdraft fees These are called NSF (non-sufficient funds) and ODP (overdraft program) fees.
- NSF and ODP fees account for over $34.7 billion dollars a year.
- These numbers vary from state to state. In Wyoming, that revenue is about $40 million a year, while in Texas, it’s a whopping $3.2 billion!
- The 20.2 million households with bank or credit union accounts pay an average of $1,374 in annual NSF fees.
- Do you bank with Wells Fargo? What about CitiBank, US Bank, or Bank of America? The chart below is a breakdown of top banks and their fees, and how their different policies might affect you:
Overdraft Fees by Bank
|Bank of America||$25 each item. Beginning February 9, 2009, $35 each item||Charges apply to a maximum 5 items per day or $175 per day|
|US Bank||1 occasion $19.00 per item; 2-4 occasions $35.00 per item; 5 or more occasions $37.50 per item||Fees are subject to a daily maximum of 6 overdraft items paid and 6 overdraft items returned - a maximum total of 12 per day or $424 per day|
|Citibank||$34 per item||No daily limit|
|Wells Fargo||$33 for every overdraft fee and $28 for every NSF fee||There are overdraft protection transfer/advance service fees depending on which account is linked to the Checking Account for Overdraft Protection:
|SunTrust||$35 per item||No daily limit|
(Table data is taken from creditinfocenter.com based on a web site survey conducted by Bretton Woods, Inc.
Now, those are already some shocking numbers, but it doesn’t end there. If you do have the misfortune of hitting a snag in the road like a medical issue, costly car repairs, or even finding yourself unemployed, your debt is still going to be right there waiting for you to repay it and taking chunks out of that poor credit score you’ve worked so hard to build up with every missed due date.
That might not cost you money out the gate, but when it comes to funding a new car, a bigger home, or a bigger family, it may amount in a larger down payment and/or longer terms with higher interest rates down the line.
So, we understand that overdraft fees and late payments are expensive for us, and a big source of revenue for banks, but what about those installment loans we keep hearing about?
Installment Loans vs Overdraft Fees
When you’re already adrift in a sea of past due notices, it’s not a good idea to take out a loan that doesn’t consolidate your debt in such a way as to give you lower interest fees and a clear exit strategy. But for many of us teetering on the brink of financial solvency and struggling to level up our finances, it might pay off to get a installment loan instead of getting slammed with fees and letting your credit score take a dive. This may be a hard pill to swallow, but overdraft fees can be even more expensive than installment loan fees, in short term and the long run. Here’s the math:
There’s an $18 fee for a $100 advance.
There’s a $35 overdraft fee if your check for $100 bounced.
Now, this may vary from lender to lender, state to state, and even year to year, but when you break it down like that, there’s no question which option is cheaper.
That being said, a loan of any kind is never something you want to simply jump into; it’s something to seriously consider. They can get you even more tangled up in debt than when you began if you aren’t responsible for how you use them - loan fees may make it difficult if not impossible to pay off with your paycheck alone. That’s why you always need to make sure you have a plan in place before taking on any new financial commitments.
When you’re looking for that right-now cash to avoid the penalties of the broke tax, (and its domino effect of fail) Missouri installment loans could be the answer you’ve been looking for!
What You Can Do to Avoid Overdraft Fees
- Keep your finger on the pulse of your finances: make a habit of knowing how much you have in your bank account, and keep a spending journal or use a budget app to stay on track.
- Get to saving: Don’t let yourself get too close to burning through your bank account. Saving just a few hundred dollars to start (and making sure you never spend beyond it) can save you big bucks on overdraft fees.
- Automate without auto-piloting: Automating your payments is great, but automating your overdraft fees isn’t! Keep an eye on your electronic payments, especially if you have automatic bill pay to avoid getting caught between late fees and overdrafts.
- Use a installment loan before you start feeling the effects of the broke tax: A stitch in time saves nine, and that goes double when it comes to your finances!
- Get a more mindful approach to money: A wise man knows there’s much to be learned. We’ve written before about the benefits of getting financial advice straight from the experts. Read more about these life-changing books and get inspired for your own journey of financial success.
Hopefully, this article has gotten you thinking a little more carefully about the pros and cons on installment loans, and how they can be a useful tool when it comes to avoiding the penalties that come with the broke tax. You know your financial situation best. If you find yourself on the verge of an overdraft fee tsunami, a installment loan might just be the best place to take cover. Fill out our simple online form, and find out just how fast and simple it can be to get the financial relief you’ve been looking for!