Lessons

Lesson Info

Segment 5 - Worst Starter Debt Deal: Payday Loan

Let's talk about, quote payday lenders all right, they may not call themselves payday lenders recently in my neighborhood a payday like loan company opened up and had a big sign that said business loans I'm going to go around pacific northwest toe all the different sources a business payday like loans where I can get a thousand dollars two thousand five thousand dollars from my for my business on a short term basis. Usually these loans roll over every month so they're going to give me the opportunity to pay back the loan at the end of the month they are going to quote you a rate based on one month now what happens in credit card land? They quote interest rates on a year basis, right? So right then and there comparison shopping gets tricky, so when I went around to these payday lenders I would ask them questions and say, what does that mean what's the a p r on your loan what's the annual percentage rate and they won't answer me you say, oh oh it's just it is chest two point five percent...

a day it is just so when you're dealing with these services and they would not go off script well, you'll have to calculate that but it is just this so you're working with people behind the desk who are not going to be candid they're not going to do that your work for you but I'm going to teach you how to dial it back so you can be that comparison. Shopper this is your money chart this is a chart that you can use for any kind of lenny relationship online lenders, offline lenders or even comparing credit cards. So if you need a thousand dollars, I want you to try and a lot of different places, but I want you to shop for the best deal now my neighborhood payday lender are they requiring a personal guarantee? Yes. Will you be able to negotiate it out of it? Probably not. They're probably going to ask, do you have customers? And they may want to ask how much you know monthly revenue you do with those customers. Ok on credit cards if you already have a personal card nobody's asking you your monthly revenues on the professional credit cards, there probably is going to be like a little box for you to fill in your monthly or annual business revenues. But again, since you have to personally guarantee it, you're not getting anything more from the professional credit card. You don't even have to offer information about what you're you know, monthly business income you may have to write down which your personal income is right average closing fee I went online to compare different credit cards if you're asking for a thousand dollars cash advance it is not uncommon for them to charge an upfront faith it may be called an origination fee or just a fee highest rates I've seen pretty much four percent you may get a special deal of two percent or one percent, but I want you asking how much that isthe so on the thousand dollars cash advance that's forty dollars out of your pocket with the credit card now let's, turn over to the payday or this lender be option and again we're looking for a thousand dollars in cash for one year because it's likely you will not be able to pay back that money as fast as you'd like right? But still the payday lender and this is a very common raid ten percent so right off the bad it's ten you know for your thousand dollars that's one hundred but what happens in the second month? Remember they are on ly loaning you money the thirty days but the person behind the death will say if you can't pay it that's okay we'll just automatically renews alone what happens the first day of the second month bingo another origination fee or another faith added to your total you now owe an extra hundred dollars with the credit card on the cash advance these are one time charges I'm not aware of credit cards that operate this way night so a one time faith but this one keeps racking up to longer your loan is outstanding, the more those fees are racking up against you kind of shocking but do they really explain it that way to know what's in the fine print they said oh it's just so easy just this and you know if you can't pay it, we'll renew it these companies love it when you don't pay off ok average interest accrual I like it when you can mark and determine the daily rate an annual rate payday so if the credit card company is charging you an annual rate a foot of two five percent what do you do to get it to the daily rate you exactly exactly he divided back to a daily rate there's three hundred sixty five days some lending organizations we use a three hundred sixty day basis but it's pretty close right so point o six percent but our payday lender is point two five on ly point two five a day beware when somebody says quotes a daily rate and on ly daily rate it is going to be monster big by the time you're done so now right away we're going to do the math that daily raid let's reverse it back now becomes ninety one percent ninety one percent our what's our effective one year rate twenty eight point six for the credit card versus two hundred ten percent for the payday lender I must say that online even if they're not around the corner some of the resource is you may find online quote rates like that and that's okay and some of them may have the best rate for you not likely I want you to be aware of it good shoppers worked the daily rate and the annual rate if you've got one you can always back down to the other comparison shop make it apples to apples don't let somebody snooker you when you hear it's on lee this strike the only and say ok, I am really smart because I know everyone in this audience is smart and you can do the math and as we were talking earlier it's asking that question and not being intimidated anymore you know better just because somebody behind desk says this is a great deal you're a better shopper than there you're smarter than their and by by the way you're going to build a business that is going to be worth uber over more then that person is ever going to make behind the desk and that's where you can feel really really good about yourselves right let's even drive down for the thirty day rate six percent versus seventeen percent the secret of your success is found simply I know this is a chart of numbers trust me and try it yourself asked about the closing rate is it a one time fee or does it renew every thirty days you can ask that question find it in the agreement look for it a rigid they may call the closing feet and origination feet whatever kind of look for it are they charging you a daily rate or an annualized rate? What's wonderful about credit cards is there are so many resource is online that will pop up and show you what the daily and our you know the best credit card deals out there now you were an empowered shopper this stuff is easy to find because I'm personal credit cards what must those companies dio they must tell you with? This is so you have that in hand now you shop can I find a better deal than this? And some of them will definitely not gay, but just because they're online I know especially for some younger entrepreneurs I've been working with they assume oh online it's going to be the coolest, hippest company it's easy cash and it seems that if you can fill out the application and two a m in the morning convenient may be the most costly shop smarter your company deserves it, you're you deserve it. Are we threatened by this anymore? People are definitely concerned about the lack of information that's out there I mean it is very easy to blind to just what's the word blindfolded into these situations because you don't necessarily get away the information cashes clears, asking that, you know, where can we find maybe online for other types of lenders that use daily rates? Where can we make sure we get all the information before we walk into one of these traps? Well, they will give you the daily rate, ok? Usually because that will sound like the lowest rate, but then if you're going to compare to a credit card or any other rate to really know, if you're getting a good deal is, then you have to multiply it into a yearly rate for a monthly rate. So you may have to do one bit of math and, you know, everybody in america should be able to add, subtract, multiply and divide. I'm not asking for anything more than that. This so you might have to pull out a calculator once just once, but I don't want you getting snookered just because you have an urgent bill that you go for the cheapest source, which seems like it's so there but it's, really the most expensive source? Remember, companies go out of business because they run out of cash. This is one fast way of just draining your company of all your hard work. If you fund your company through a source like this, I guarantee they will wipe away your profit yes, the whole concept of planning you don't want to find yourself in this situation you want to stay away from play payday loans you want to be in this situation if you need money you go to a credit card and establish credit card exact so it once again it's about planning in shopping yeah so um it's not uncommon all right when I marched around and posed as a business person who is kind of clueless and didn't know howto addison tracked and I put it on you know sat down with these different people because I wanted to learn what they were telling people one of them said oh as part of their sales pitch you definitely don't want to get a credit card because you've heard about how horrible the credit card companies are to you this is a better option and so people very sophisticated sales people will know how to play off your fears but we're now fearless because we are not intimidated toe look for the numbers so I'm just going to go over one more time what are the fees just sometimes if it's a fifty dollars loan or five hundred they'll say oh it's just ten dollars well it's just this work out what that means right? Daily rate versus annual rate you can do that work it backwards don't get snooker because they say oh we just charge or they might say if you're asking for a thousand dollar we just charge twenty five dollars a day that's it. Oh, ok let's let's add it let's be empowered and not letting anyone take advantage of us again. Simple questions. Yeah, this is an interesting credit question that has came in from b does branding, and they want to know why you're advocating for personal credit cards instead of building a business credit now, especially for getting a done and broad street profile. They say that some creative have had corporate clients and these clients look to the dunn and broad street when considering vendors. Okay, I still want the risk and reward now. Dnb, by the way, is not the only small business credit service in america. There are several of them. It wouldn't surprise me if somebody from d b is writing that as by the way so that's number one, if you there are a number of ways there two questions built in there um, a business credit card doesn't necessarily report your payment records to business credit cards, so it let's say, for example, you have a professional small business credit card from a bank. There is no requirement on that bank to send the credit information to those various credit reporting services, including dnd so right there you have a disconnect dnb may be saying you may want this because we want you to buy our service and pay money to us to you know, pony up you know again this is all about consider the source and what they're serving and how they make money dnb makes money from fees that you pay them okay business credit if you pay your bills responsibly for a lot of ways if you have a new vendor relationship um business credit card or business reporting services are notoriously out of date right on a lot of things that you have disputes on it's not the gold standard so why should you put your position yourself in a position that absolutely works against you? Absolutely in terms of the cash you have to pay to borrow cash my number one goal is for you to protect your cash and if you spend cash you get value back for it you must shop for your lowest deal because businesses close when they run out of cash vendors you have the opportunity when you're working with a new vendor and he'll say how good are you a paying your bills? Why can't you give them a list of your other vendors that you've worked with successfully? Why can you negotiate directly with the vendor? Maybe the first time you pay a down payment and then you continue to pay it off it's the relationship with that vendor should not be dependent on what's over here and most small businesses are not necessary you know most service businesses not contract manufacturers, so a lot of the d m v services that they're talking about are not even appropriate for start up entrepreneurs justin be has followed up on because they know they're not nothing to do with tv sorry about that reasoning boarded up because they have been asked twice by potential vendors. What is your d n b rating? What it's going to be number that's why they brought it up they also saying that when they've opened their accounts with their banks they've been offered very large lines of credits and they've been very worried about the access saying they won't be able to control that credit because they know the rates come very says another trap I'm sure that they and so my question to on the line of credit I guarantee there is a personal guarantee behind that what I would dio is asked that bank let me see the term sheet or let me see the proposal and deal terms that's number one number two whenever somebody's offering me credit I say ok, how much is it going to cost me? Because you don't know if it's a good deal and it's great to know if you might need to use them what's available find the cost find the fees find out whether or not there's personal guarantee in that specific situation my guess is that line of credit could either be offered through professional credit card that's the question asked is this a separate line of credit to my business that might be secured by I don't know this specific business is there what type of business or in if there's inventory receivables or other things by no more I can offer some more guys but when somebody asked who offers you a line of credit is it through their credit card or a separate line of credit? They're two different animals and is it a fixed reiter a variable rate you've really helped me because he is saying this is great I never thought to ask for the term sheet deal turns before so I'm going to get that before I proceed sir thank you susan said now I'm buying the course thank you hey I am here to help everybody so if you have questions or fears or concerns bring him forward because we can all learn from him what we have what we do know is there is a fear of debt and there is a debt that I don't want you to take on but also debt that could be good and help advance your business. So in no way am I saying is all debt is bad the best that you will only know if you ask the questions and know how much it will cost you to get that cash you're the shopper as long as you think of yourself as a shopper you are empowered and less likely to be taken advantage or snookered and say I wish I would have known better more questions scary thing this is a big scary slide this is the big scary slide oh no no everybody in the audience has seen it so what does a thousand we add up all those fees and the interest what does thie cash advance you might need a thousand dollars cash advance which is your better deal is great shoppers the credit card two thousand one hundred dollars is the cost through the payday like financing source what could you do with about eighteen nineteen hundred dollars difference in your company you could buy a lot of google ads right but that's lost cash and what's worse is you didn't get a customer for it it didn't buy you much it's cash down the drain so this is where numbers could be so empowering don't coat don't take that deal isn't there a game show deal no deal no deal deal right but the longer that type of debt is outstanding I look at is truly quicksand the longer you're in the more you sink down and dead the more you jeopardize your business and all your hard work deserves better and you don't have to take the deal so beware some of these resource is they may not look like the payday loan it may have the coolest looking website but the terms are the same here's the difference in a p r I like your expression on your face, right there. Thiss shocking view. All right, if somebody said I never came across in all the research when I was interviewing and going to these different payday lenders, by the way, we're going to charge you three hundred ninety percent, nobody ever said that to may. I kept trying to get them, and I'd say why I'm doing a little bit of math sightings, and could that be a couple of hundred percent? No, no, no, no, we only charge point two, five hundred, you know, they kept to the script. Doesn't the mop charge better? Well, I don't have personal experience in that, possibly, but I'm not so sure. I'm recommending that. I guess my point is, is that if there if if we've got regulations on the all the private side, why aren't these thiss makes me nuts. You don't want to go there with me on this, but it's all outside these types of kind of new breed lenders are entirely outside of most state laws, you some of them there are some states where this is illegal, so who has companion control over this it's, the state legislatures that have allowed this stuff to go on there's, no. Cap on the lending rates or fees in terms and conditions that are out there. So a lot of these online resource is you might get a very strong clue if they say, what state are you located in and you dial down and they're not in certain states, but where they're offered this is what they charge, and they can go a lot higher than this too. So imagine the more you borrow, you know, and by the way, here's, what also happens when you go to these kind of funding sources, the fact that you've gone to that kind of funding source immediately goes on your credit score, so it is the quicksand you know, it's the fast track to doom problem, we shouldn't just highlight the us here the's exist all over the world. The european union community is currently trying to legislate together a unified approach across the all of their nations, but it is a problem a lot of travel lot of people fall into, so what you do again? I hate to be a broken record what's the upfront faith. Does the upfront fee happen every month or every quarter? How often what's the daily rate an annual rate, then you can comparison shop any questions from online this's a question from time caps only want to know is there an in between option so if your credits already horrible and you can't get a regular credit card, but you don't want to go for this quick sand trap of crazy quick money, is there something in between for people? I'd like him to start out with microloans, microfinance, loans, so and, um, suppose you pay them off faster. A lot of microfinance companies don't have pre early prepayment penalties there. Bigger loans out there, where sometimes a thirty five thousand dollars loan or twenty thousand dollars loan from a microloan versus an espy, a back loan will involve more fees than the microloan. I'd like to encourage people to at least shop for some of those other resource is, yes, said the answer is yes, and shopping questions here. No, you ever go to the, you know, I'd hate to see what you say to the person behind the door. Is death what I'm on to you, right?