Learn About Interest Before Signing On The Dotted Line



We scoff when we see people in a movie lined up behind a traveling medicine man's wagon to pay him for a worthless product.

In modern times we're bombarded with television ads promoting even riskier purchases. First, we see Matthew Lesko in his clownish suit yelling about government money to be had for the taking if we buy his book.

Another salesman offers to teach us option trades on the stock market, even though it involves "substantial risk and is not for everyone."

We must never forget that a good salesman can sell anything to anyone.

According to Reuters News Agency, the Securities and Exchange Commission this month settled a case against a New Jersey teen who allegedly made more than $272,000 in profit from an Internet stock fraud manipulation scheme. Beginning when he was 14 years old, he used hundreds of identities in e-mail, in Internet chat rooms, and even on Yahoo!'s message boards to make unsubstantiated claims about companies. He had already purchased large blocks of the low-priced stocks that he touted, and would then sell the stock within 24 hours of the resulting dramatic rise in price.

We should know to not take the advice of a stranger on the Internet.

Even a legitimate business with good ratings from the Better Business Bureau, such as the Consumer Credit Counseling Agency, might sell us on an agreement that takes a 22-percent credit card balance and turns the effective interest rate into 28 percent or more by reducing the monthly payments over an extended period of four years and charging a $5-$20 monthly administrative fee. Unless we do the math ourselves by using an amortization schedule in Excel or Quicken to figure the effective interest rate using the initial debt, the monthly payment amount, and number of payments, we might think we're getting a good deal. By multiplying the number of payments by the amount and comparing that with the initial loan amount, we'll get a good idea of the cost of borrowing.

We can protect ourselves by always doing our own math calculations, by researching the product ourselves, and by knowing the warning signals of a scam or a legitimate, yet expensive "deal."

The Arizona Attorney General's site at http://www.ag.state.az.us./consumer/helpful.html provides consumer checklists and strategies to help us avoid contract pitfalls. Among the Top 10 Consumer Myths is clarification that only a few purchases have a three-day right of cancellation, or fall under "lemon laws."

If we need help with specific laws governing credit purchases, the information can be found at http://www.azleg.state.az.us/ by clicking on "Statutes."

Article 44-1207 allows a lender to add "Any lawful charge, fee, cost or expense to the principal amount of a loan and such amount shall become part of the principal, and interest may be charged thereon ...

"A. A licensee may contract for and receive finance charges on consumer loans that are not more than the following amounts:

1. On a consumer loan in an original principal amount of $1,000 or less, a consumer loan rate of 36 percent (is allowed)."

Say we need to borrow money or make a large credit purchase. If we sign a contract to borrow $1,000 at 36 percent for four years with monthly payments of $39.58, the total cost will be $1,899.84, or nearly twice the amount borrowed. In addition, interest, late fees, and any other allowed charges can be added to the principal, so that we pay interest on interest.

If any children out there are asking why they need to learn math, this is why. In the days of traveling medicine shows people usually didn't lose their entire savings needed to fund their retirement. We've signed over our lives to a credit card lender instead of the company store. We live in times of "buyer beware" as never before.

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