Some offers seem too good to be true. And generally speaking, they are just that. Here are three examples.
Buy a New Car and Pocket $5,000 in Cash
The Red Tape Chronicles’ Bob Sullivan digs into what are known as negative equity loans—specifically, situations in which a consumer can borrow, say, $30,000 to buy a $25,000 car. The scenario typically arises when a customer trades in an “upside-down” car—when more is still owed than the vehicle is worth—for a new one. Sullivan explains how the old debts are combined with newer ones:
How can a dealer sell a new car to a person who can’t pay off their old car loan? The dealer finds a way to roll the payoff amount into the new loan. Such negative equity car loans came into vogue during the go-go lending days before the financial crisis.
Essentially, the old loan becomes a newer, fatter one—often without the best of terms, as you’d imagine. Sullivan describes what’s entailed with one offer in the New York City metropolitan area, in which dealerships are trying to attract buyers by waiving an extra $5,000 in cash on top of the loan for a car. Besides compiling more debt, the downside is that to get the cash, the car buyer must forfeit any right to negotiate on the price of the car. You must pay the sticker price, or even above sticker price, as Sullivan writes:
Experienced car buyers know that most consumers don’t pay full MSRP when they buy a new car — there’s almost always room for negotiation. Some dealers, however, have learned to really take advantage of inexperienced buyers by adding what’s sometimes called a “second sticker” to their cars, jacking up the price a few thousand dollars above the sticker price. These often come with a vague explanation like “local market conditions,” but rarely do consumers need to pay these higher prices.
Also, as you’d imagine, the interest rates on these negative equity loans are typically higher than traditional loans. They’re especially higher for buyers with bad credit. And let’s face it: Chances are anyone who is interested in these loans probably doesn’t have the best credit.
Pay $15 a Month to Pay Off Debts Quicker
LA Times’ columnist David Lazarus investigates a product sold by Equifax, one of the leading credit-reporting bureaus, that says it’ll help you “Get Out of Debt Faster.” The product is called Debt Wise, and it costs $14.95 a month. In his review of the product’s fine print, Lazarus notes:
It says that “Equifax will not negotiate on your behalf with your lenders and creditors to obtain new or different loan or credit terms for you to eliminate, reduce or settle your debts.”
It also says that “Equifax does not imply, promise or guarantee that Debt Wise will or may improve your credit record, credit history, credit rating, credit score or debt-to-income ratio” and that “adverse credit information based on your past credit behavior cannot be changed.”
Hmmm … so what does the product do? Basically: math. You enter your debt data (amounts, rates, etc.), and it spits out suggestions for what you should pay off first, and at what pace. The recommendations generally boil down to some form of the popular “debt snowball” technique, in which you focus on paying off one debt at a time—and as each is paid off, you’ll have more free money to increase the pace of paying each remaining debt. Becoming a debt snowballer doesn’t have to cost the practitioner a dime, let alone $14.95 monthly, as one expert quoted by Lazarus says:
“You could just as easily do this with a yellow pad,” said Dave Ramsey, a financial radio host who has long championed the debt snowball method. “It’s not rocket science.”
If any of these products or sessions actually help you get out of debt, they’re obviously money well spent. But like Ramsey himself says, all that you really need is a pen, yellow pad, and (here’s the hard part) the strength and discipline to change your habits and start earning more than you spend.
Take a Loan from Your 401(k)
OK, so actually, a post from U.S. News’ Kimberly Palmer, author of Generation Earn, makes the case that, under very specific circumstances, it can be OK to take out a 401(k) loan. She explains:
As a new paper from the Michigan Retirement Research Center points out, using 401(k) loans to pay off high-interest rate credit card debt can save money. And if more people felt comfortable using their 401(k) loans to spot themselves cash when they needed it, then they might be more likely to ramp up their savings rate, since they would know they could access the cash if necessary.
Sure, taking out one loan to pay off a higher-interest loan can make sense. But 401(k) loans are tricky, with stipulations such as the requirement to pay it back in full within 60 days of leaving your job or getting fired. Hopefully, such a loan would be used strictly as a one-time fix, and anyone considering such a loan should evaluate his situation closely, understand the fine print, and think twice (or three times) before going forward. The problem is that taking out such a loan could kickstart a vicious cycle of one loan after another. Debt might be taken on quickly and thoughtlessly—and it could very snowball in a very bad way.