You do understand that the banks are in business to make money, right?
I was a bit amazed recently as I listened to a banker try to sell more debt to the customer next to me. She was simply doing her banking transaction when the head banker approached her kindly and started in with a pitch about great rates being offered by the bank now for debt consolidation and home refinances to “make those little fixes on your home.” He went on to say that the current rate was 2.35 percent, “so why wait or take the money out of your pocket”?
I tried not to let my eyes bulge too far out of my head, but was interested in the conversation taking place.
The customer immediately got sucked into the pitch and looked up as if misunderstanding. She said her deck needs some work, but her husband keeps saying they can’t afford it. Is this the magic ticket? That rate seems really low. The banker opens a wide smile and tells her how eligible customers can get ‘special interest rate discounts.’ He asks her to have a seat at his desk. Of course, at that point I am left to guess how the conversation goes, and whether this banker has made a “sale.”
When I looked at the fine print I saw that the borrower could get money for “managing debt, additions to the family, unexpected medical bills, moving expenses, or any other special event you’ve been waiting for.” It was the last part that really got me. Is this woman who walked into the bank today to cash her check or make her deposit going to walk out of this bank feeling like the cat who ate the cannery because she now has $20,000 or some other absurd amount of money in her pocket ready to use for “that something special” she’s had her eye on? Is she thinking that such an exceptional interest rate is just too good to pass up? Can she now go on that vacation with her grandchildren before they are too old for Disney? Or maybe she can finally get rid of that 1990s kitchen she has been living in?
This customer and thousands like her have unknowingly walked into the clutches of the big bank. First, you should not spend money you do not have. You should not borrow money, no matter how low the interest rate appears, or how desperate you are to go to Disney. You should not borrow money from tomorrow for today’s desires.
In my opinion, waving this interest rate in the bank customer’s face and painting a picture of ease and comfort in making this choice, because, hey, the rates are going up soon, better get in while you can, mentality lulls the average American into believing that he or she is entitled to go on vacation and get the kitchen updated.
I am here to tell you, make a budget and save to do those things. When you have amassed a pile of money that is your money, then you can consider going on vacation. When the nice man at the bank smiles at you and offers you candy, think of the nice man telling your kid to come and pet his dog.
Only when you are in the market to borrow, have a solid plan as to why you are making that decision and investigate different banks to find the best rates should you consider taking out a loan.
When are you in the market to take out a loan? When the money you are taking out will improve your life on a long-term basis. Education? Yes. Invest in your own business? Yes. Invest in a home? Yes. Home improvements? Maybe. Vacations? NO. Any other special event you’ve been waiting for? NO. Avoid bad debt.
You simply have to change your mind set from charging today’s expenses to tomorrow’s income. If you have money saved and can pay for your needs and your wants as you go, you have freedom. If you are going about your daily business thinking of all the things you want, and how easy it would be to sign off on a piece of paper to get a chunk of money from a bank before you actually earn that money, think long and hard about how much more you are going to have to work to pay that money back. Think about not only losing your future money, but also the interest you could be making on your money if you didn’t have to be paying that money back for months or years to come for an adventure or material need long gone.
You may pick a banking institution because it is the bank your parents have used for years, or the one you started with in college, or because it is geographically located by your home or office (and I like that reason because I do not want you wasting money on ATMs out of your network). While those factors may have some relevance, be smart. Do not be lured in to products. Do your research. If the deal is really ending tomorrow, wait until next week or next month. Another attractive deal is always around the corner, if you are patient. And if it looks too good to be true, it likely is.
Banks are in business to make money. Your money. If they are willing to loan you money, at any rate, they are confident (based on their analysis of your credit history) that collection on the principal and the interest they assigned to your loan is a good bet. Actuarially speaking, they are in the business of looking at you and your history and, if you play, they are going to win.
Like any game, you need to know the rules. The penalties for not reading the rules and understanding the consequences of your money moves can have long-term effects that could cost you thousands of dollars and years of hard work. Read the fine print. Make money decisions cautiously and with knowledge. You work too hard for your money to give it away.
I’m a debt settlement and bankruptcy attorney who negotiates resolutions between clients and their creditors. I am also a real estate attorney involved in both sides of purchasing and selling distressed real property. I am passionate about teaching people about money and helping individuals of all ages achieve financial independence and success in a "no…
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