Everyday Cheapskate: Meet Your Own Personal Loan Shark

Mary Hunt on Oct 2, 2024

Imagine paying outrageous amounts of interest to a greedy finance company and loving every minute of it. Or how about 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'll be borrowing from yourself, making payments to yourself and collecting high rates of interest -- all from you and for you.

The original idea of the credit union was to get the little person out of the clutches of the big money institutions. Credit unions are still a good idea! But even credit unions have their limits and standards when it comes to qualifying for personal loans. Being your own lender simplifies even the credit union strategy to just one person -- you. And when you're wearing the loan officer hat, dealing with you, the borrower, both the lending and repayment benefit only you. What a deal!

So, how does it work?

First, open a special savings account at a credit union or an online bank like Ally.com, or my favorite, SmartyPig.com. Don't get this confused with your emergency fund or investment programs. You already should 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% annual interest. They'd "let" you pay it back with monthly payments for a total of $726. And if you made this deal with a back-alley loan shark? The terms would be much worse with the added feature that if you're ever a second late with a payment, you could find yourself looking for a couple of knee replacements.

There is a way you can make this a lot easier on yourself. Lend yourself the $600 out of your special savings account, charge yourself 18% interest on your loan ($108) and divide the $708 you will owe yourself into 12 equal payments of $59. Your loan will be paid off in one year. 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 in the account, the $708 you paid back, plus the $1,040 you deposited 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!

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Mary invites you to visit her at EverydayCheapskate.com, where this column is archived complete with links and resources for all recommended products and services. Mary invites questions and comments at https://www.everydaycheapskate.com/contact/, "Ask Mary." This column will answer questions of general interest, but letters cannot be answered individually. Mary Hunt is the founder of EverydayCheapskate.com, a frugal living blog, and the author of the book "Debt-Proof Living."