Imagine paying outrageous amounts of interest to a greedy finance company and loving every minute of it. Or making off-the-record back-alley deals with a loan shark so you can skip all the credit checks and paperwork. Impossible? Not if that loan shark is you. You can borrow from yourself, make payments to yourself and collect high rates of interest from yourself — all from you to you.
The original idea of the credit union was to get the little person out of the clutches of the big money institutions. It's still a good one, but even credit unions have their limits and standards when it comes to qualifications for personal loans. Being your own banker even simplifies the credit union strategy to just one person: you. And when you wear the loan-officer hat and deal with you, the borrower, the lending and repayment benefit only you. What a deal!
So, how does it work?
First, open a special savings account. Don't get this confused with your emergency fund or investment programs. You should already be saving consistently for the future in those ain't-nobody-ever-going-to-touch-it kinds of accounts. This is a special management account that you will handle differently.
You can start your new account with anything, but you should feed it with a weekly contribution for a while. If you can put in $20 a week for 12 months, you'll have about $1,000 after a year.
Let's say you need to borrow $600. A typical shady finance company would charge a whopping 21 percent interest, or $126, to borrow that amount. They'd "let" you pay it back at the rate of about $30 a month for two years, for a total payback of $726. A loan shark? The terms would be much worse with the added feature that if your payment is ever a second late, you could find yourself looking for a couple of knee replacements.
You can make it easier on yourself. If you charge 18 percent interest on your loan ($600 times 18 percent equals $108) and divide it into 12 equal payments of $59, your loan will be paid off in just one year, costing a total of $708. Suddenly, the greedy finance company is YOU.
If you keep up your weekly deposits of $20 while you pay back your loan, you'll have something like $2,150 in the bank at the end of the second year (the $400 balance plus the $708 you paid back and the $1,040 you deposit in year two).
After you've paid back the first loan, perhaps you'll want to borrow $1,000. The greedy finance company would charge about $255 to do that. If you charge yourself $180 and make monthly payments of $50 for two years (or $100 a month for one year), you'll wind up with well over $3,000 in your account.
As the borrower, treat yourself the same way the finance company would. Demand timely payments. Unless you're terribly hard on yourself, it's not going to work. You'll default. And just imagine how that will work on your psyche.
But if it does work, you'll be living the life of a banker, buying things you want and piling up the dough. What a way to save!
Mary invites questions, comments and tips at [email protected], or c/o Everyday Cheapskate, 12340 Seal Beach Blvd., Suite B-416, Seal Beach, CA 90740. This column will answer questions of general interest, but letters cannot be answered individually. Mary Hunt is the founder of www.DebtProofLiving.com, a personal finance member website and the author of "Debt-Proof Living," released in 2014. To find out more about Mary and read her past columns, please visit the Creators Syndicate webpage at www.creators.com.
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