How To Avoid Debt
But for most people and your own financial future, it will be very important to not get into debt at all.
The problem is, that banks very often play an unfair game. And the way credit offers are structured is made in a way that hardly anyone understands them. Clearly, this is not a coincidence, but a tactic the bank uses to get more money out of you.
In this blog post you will learn what to watch out for in these scenarios and how to avoid getting into debt at all.
Why Most Credit Offers Are A Trap
If you have watched TV for only one evening in your life, chances are very high that you have seen at least 5-6 commercials of different financial institutions, all claiming to give you a lot of money fast and for basically no fee at all.
They sometimes even do not sound so bad.
Especially when money is tight, these fast & easy money offers can be very tempting.
Whether it is the new car, a trip around the world or just the new washing machine because your old one just broke down - they seem to have the solution for everything, right?
And their offers sound reasonable too, and hey, it's for a limited time only!
How can you possibly lose on that one?
It’s a trap.
Exactly this is what you have to avoid to stay out of debt.
Please read closely now to understand the 3 big factors of expenses on a loan:
What you must understand is that there are fees on everything they offer - as soon as someone in a bank has to lift only a finger, you will be charged with it.
The fees range very differently, for a 10.000$ loan they can often be up to 1.000$ making it 10%.
Note that this is not yet any form of interest rate, this comes in addition to the interest rate and other costs!
Only for larger sums the amount gets a little more reasonable: a 100.000$ loan will have around 2.000-3.000$ in fees, making the fees 2-3%.
But of course, these numbers may vary. Vastly.
The next bump in the road will be the commissions on the loan.
To use the same numbers again, the 10.000$ loan will cost you around 300$ in commissions you have to pay for the bank to provide you with the credit.
For a 100.000$ loan, the commission will be around 3.000$.
3% is a number often used in the distribution of credits and loans, some range higher up to 5% or even 6%, while you can also manage to get a really good loan with only 1% or 2% commissions.
Interestingly, commissions are never mentioned during any conversations with customers unless the customer asks directly for them.
But don't worry, it is all stated in the fine-print, somewhere on page 47 probably.
You didn’t read or understand the 58 page contract?
Too bad for you, you signed it. The banks wins.
Here we can see another interesting fact: the commissions are usually a rather fixed percentage, while the fees can be adjusted wildly.
Commissions are usually paid to the salesperson like a broker or bank teller, while the fees are what the bank earns additionally to interest.
This is making sure the bank will always receive a good amount of money even for providing only a small loan.
That’s why there are so many small lending firms around. They can charge massive fees for ridiculously small or even automated services, on top of charging you interest.
This business is foolproof, unfortunately for the client.
And of course then comes the famous interest rate.
Depending on the key interest rate deployed by the central bank, the rate the bank will charge upon you will differ.
But there are other common factors that will determine if you will get a good or a bad interest rate. One of them is your own personal credit rating and validity.
If you earn a lot and have a high education, the bank will love to lend you money.
On the other hand, if you have a very small income and come from a poor and uneducated background, the bank will charge you insanely high interest rates because you are then considered to be more of a“risk”.
In plain english, this means that the less you are in need of a loan, the better it will be. And the more you are in need of it, the higher the costs.
Maybe you heard the saying that a bank lends you an umbrella on a sunny day, and asks for it back as soon as the first cloud shows up.
This pretty much sums it up.
A big misconception many people have is that they only pay a certain interest rate on the money they use.
But you also pay it on all kinds of fees and commissions which have of course already been calculated inside your monthly payments, to make sure hardly anyone finds them.
So the high fees and commissions that you get charged additionally, are also additionally charged with interest.
Making money with money - how brilliant, isn’t it?
Altogether, you will pay an enormous amount and can easily pay back twice or three times the amount you actually lended.
Therefore, think twice and be careful if you ever intend on using a loan for something.
It’s a trap.
Why The Bank Always Wins
If you have ever taken on such a loan, how does it continue?
If you want to avoid getting into debt, you should know the most important things here.
The bank's concern officially is to get its money back.
That’s why they charge one person more interest and fees when their income is low, and the other person is charged less when their income is high.
But that is not the whole truth.
It is one of the biggest scams in our financial system. Let's take a look at what really happens if you use a loan and somehow are unable to pay it back:
Say you bought a house to provide a home for your family and of course you and your spouse had to use a mortgage for it.
With all your saving you could come up with 80.000$ down payment.
As the house you want to buy costs 450.000$, you had to take the missing 370.000$ from your bank.
Let's assume your wife has a bachelor degree and you are an engineer, which makes a pretty good income situation here.
The bank grants your loan with 4% p.a. effective interest rate (that means including fees and commissions), making it look like a cheap loan and good deal for you.
The running time will be 30 years.
At 30 years running time, the monthly rate you will have to pay will be 1766,44$, assuming that the interest rate would not increase and stay at an all-time low like it is now for the next 30 years (which it probably won't).
For the 370.000$ you would pay back in total 635.917,17$, making it an astonishing 265.917,17$ dollars for the bank just in fees and interest rate!
Of course this is based on the historical low interest period we have right now.
If the interest rates would rise, your expenses and monthly rates would rise exponentially.
Talking about making good money!
And now what would happen if you poor fella could for some reason not pay back the amount anymore after 10 years?
Despite having already a ridiculous amount of margin on the money they lend you, the bank does not just stop there.
In the ideal scenario, you pay them the rates and full interest as stated in the contract and they make an awful amount of money as you could just see
Now what would happen if you paid it for 10 years, but then you lose your job because of some shift in the economy that affected your company?
And just a few months later, your wife gets diagnosed with cancer.
A few months later she loses her job too, because she is not fit for work anymore.
Despite having no income anymore, there are now also medical bills of several thousand dollars for treatment and medication of your wife.
Since you try hard but have no other financial option, you just can't pay the loan anymore.
Now during the past 10 years you paid the bank full rates and on time, just as stated in the agreement.
During this time, the bank received full interest payments, fees and all other costs and margins associated with these “costs” on the loan.
Now, since you can't pay them anymore and it currently does not look like you will be able to pay the full amount in the near future, the bank doesn't care that it might be a recession or that your wife has cancer.
They want their money. And now things get ugly.
In the fine print of their 60 page agreements, somewhere you signed that they have the full right to foreclosure of your property once you are no longer able to pay them for whatever reasons.
And they will make use of this right.
And here comes one of their dirtiest tricks, and this is the reason why banks will almost always lend you money to buy a home, even if they know you will not be able to pay it back:
Although you have paid 10 years with full margins and fees, they will take your home to foreclosure and sell the whole object, meaning your entire house and not just a few rooms.
Since you were “breaking” the agreement, those 10 yearsin which you paid the full rates for the house will not be considered as something you own.
It all still belongs to the bank!
That means they had 10 years of full profits, then they will take your home completely and kick you and your family out on the streets and sell the whole property for their profits.
Wow, what a business model!
You paid for it to a part, they still take the whole object, and then they get to keep all the profits from the sales!
Do you think it stops here?
It would be so good if they had already enough at this point.
But banks have an unsatisfiable thirst for more.
In financial terms, they are the worst monster you can think of.
After they have taken advantage of you two times already, they come for a third round:
even after the property is foreclosed and sold, in many times again with a profit for the bank, they then will hunt you down to any place in the country with their lawyers because legally speaking you did still not pay back your debts.
The house is gone and sold for a profit - but the bank still wants the full amount of the loan.
How insane is that!
You made them rich during 10 years of expensive payments, they take your home, sell it, keep all the profit and still they wont stop and chase back the rest of the loan that is outstanding from you.
It makes them a profit with massive margins three times from only one “bad” customer they lend money to.
In some cases, the bad customers can in this case be better for their business than the good ones who always pay their loan on time.
And yes, they are legally in full right to do this and have enough expensive lawyers in place to do just that.
Imagine buying a product for 1.000$ and then paying 5.000$ for it ultimately.
If something ever goes wrong with your mortgage, you will have exactly that, only with more zeros.
The bank will profit during your payments, they will take the entire house and sell it all for their profit, and afterwards come back to again charge the full amount.
Such bulletproof concepts for the banks lead for example to the insane housing crisis in 2008, because everybody was granted a loan since banks could not lose on them - until the market crashed.
The end of the story?
Avoid debt at all costs. Any kind of debt.
It is not fun. The bank is not your friend.
And no, it is not a good offer.
Keep your dream alive!