A new survey by Price Waterhouse Coopers and George Washington University’s Global Financial Literacy Excellence Center finds that 42% of the 5,500 Millennials surveyed take out a payday loan or auto title loan, used a pawnshop, got a tax refund advance, or purchased a rent-to-own product in the past 5 years.
“Taking out payday loans or auto title loans is a very dangerous practice and can leave the lendee in more financial harm than good,” says Rianka Dorsainvil, CFP®, President and Founder of Your Greatest Contribution. Dorsainvil also serves as 2015 President-Elect of the Financial Planning Association’s NexGen community.
“If you read the very fine print, according to the Consumer Financial Protection Bureau (CFPB), the cost of the loan (finance charge) may range from $10 to $30 for every $100 borrowed. A typical two-week payday loan with a $15 per $100 fee equates to an annual percentage rate (APR) of almost 400%. By comparison, APRs on credit cards can range from about 12% to 30%. In the long run, if the lendee is not able to pay back the loan in full, they may end up paying back more in fees than they borrowed,” she adds.
Still, experts point out that Millennials have a harder time than most making ends meet. “Millennials confront greater difficulties — including economic uncertainty and student debt — than those who came before them,” Price Waterhouse Coopers and George Washington University researchers say. “As a generation carrying new personal responsibility, it is critically important for Millennials to be on a path leading toward financial security,” researchers say.
One of the biggest financial struggles Millennials have is with student loan debt. Research by the Global Financial Literacy Excellence Center finds that two-thirds of Millennials (those aged 23–35 in 2012) have at least one source of long-term debt outstanding — whether it’s student loans, home mortgages, or car payments — and 30% have more than one. Among the college-educated, a staggering 81% have at least one source of long-term debt.
Recorded by Anna Wostenburg
As for managing short-term expenses in the face of long-term debt, Dorsainvil recommends the following:
- If ready access to cash seems to always be a problem, then focus on looking at your spending for the past 30 days and ask yourself if the items you are purchasing are ‘needs’ or ‘wants’. If it falls in the ‘want’ category, then start stashing that money away in a rainy-day fund so you can start borrowing from yourself and stop borrowing from financial institutions and paying them back with very high interest. I always tell my clients: short-term sacrifices for the overall financial goal. If you are still running into short-term cash flow problems, it is definitely past time to create a budget/spending plan.
- After Millennials have established a rainy-day fund/emergency fund, then it’s time to start investing. If you have a little wiggle room in your budget, then I would say focus on deferring a percentage of your salary up to the employer’s match in your retirement account. You do not want to leave any free money on the table.
- As far as debt reduction, focus on intentionally paying off one bill at a time, of course while staying current (paying the minimum) on all other bills. Once that particular bill is paid off, take the monthly amount you are accustomed to paying and add that amount to the next bill. Essentially it’s a snowball effect.
Always remember that as difficult as cutting back may seem in the short run, the financial choices we make today affect our financial and personal well-being in the future.