6 Expensive Fast Cash Loans And How To Avoid Them

by Silicon Valley Blogger on 2009-09-2314

Before you pick up a personal loan, be wary of where you look!

You’ve got limited options when you have bad credit and are in a financial bind. While a lot of people may not have much sympathy for consumers who have fallen into this trap, I can see just how easy it is to get in this position. What if you just don’t make enough money? What if you work a menial job and end up with a chronic illness? A lot of people are one accident or health problem away from going broke. And I’m talking about the responsible ones!

I can sympathize with this predicament because I live in a state that has a very high cost of living (trickle up effect, thanks to the uber-wealthy around here), but most of us are still regular workers of regular means, trying to get by. Teachers, for example, aren’t paid the mega bucks to easily afford a $2,400 monthly rent on a small home.

I can therefore understand (not condone) just how borrowing money often seems to be the only way when you’re confronted with unanticipated expenses. So I was hoping to offer this article as a way to warn consumers of certain loans that the New York State Office of Financial Empowerment considers “dangerous”. I’ve added a sixth based on my personal experience. With overpriced loans, you can wind up in deep debt.

bad credit loans, quick cash, bad debt

Fast Cash Loans: The Costs Aren’t Worth It

1. Tax Refund Anticipation Loans

When you just can’t wait to get your tax refund back from the government, you might be tempted into a Refund Anticipation Loan (RAL). These high interest loans are offered by tax preparers based on your anticipated tax refund. Typically you wind up spending around 10 percent of your expected refund on interest and fees. The check only takes two weeks to arrive which equals 300 percent annual interest on an RAL. Patience is a virtue that will help you avoid costly RALs and make the most of your tax refund money.

2. Pawnshop Loans

Expensive electronics, musical instruments, guns or jewelry are often used as collateral to obtain pawnshop loans. The loan you’ll get from a pawnshop is usually less than half the pawned item’s resale value. When you pawn something, you get a few months to repay the loan; if you fail to pay up, the pawnshop is allowed to keep and sell the property. You’ll be paying dearly for the privilege of receiving that quick cash, as pawnshops will charge you interest, storage costs and insurance fees. Once again, many borrowers wind up paying about 300 percent interest on pawnshop loans. If you can’t come up with enough cash, you’ll spend significantly on storage fees or wind up losing a treasured item. I actually know a few people who own pawnshops, and they are some of the wealthiest people in their town — it’s clear why!

3. Rent To Own Loans

Specialized shops offer you the opportunity to rent electronics, furniture and appliances until you own them. If you miss a payment on rent-to-own goods, the store can repossess the items. Here’s what’s crazy about this: even if you’ve paid more than market value, you can lose what you paid out along with the merchandise! Research reveals the sad fact that around 75 percent of rent-to-own customers actually lose their cash and goods when they are unable to make the payments. Now if you’re actually in the minority and you get to keep the stuff, the news isn’t any better: even if you pay off the goods and own them, you are likely to pay double or even triple the market value for rent-to-own items. Either way, renting to own is a waste of money. So why do people do this? Because they are unable to delay gratification.

4. Cash Advances On Your Credit Cards

You have a credit card so you have access to cash, right? Well, you may think twice about gaining access to that cash when you consider what it will cost you. When you take a cash advance on your credit card, the interest rates charged are higher. Typically, a cash advance fee is also charged, which amounts to an additional percentage of your balance. The scary part? Interest paid for cash advances often exceeds 20 to 25 percent. That’s a lot to pay for a little cash!

5. Overdraft Protection Loans

Some banks may offer you overdraft protection for your checking account, which is nothing but a loan that lets you draw money from an account with a zero balance. The bad news is that average overdraft fees are anywhere from $25 to $40. If you’re set on wanting to make sure you don’t overdraw your account and you want to have a “safety net” in place, then another possible alternative is to have your checking account use your savings balance to cover overdrafts. While there is usually a fee for this as well, it’s usually much less than the cost of an overdraft.

6. Payday Loans

To get a payday loan, you apply for one with a lender, showing them proof that you can pay. After signing a loan agreement, you send the lender a postdated check which they hang on to while they hand off the cash to you. After the length of the loan’s term (which is very short, usually a couple of weeks), the lender will cash your check, which will include the amount you owe plus interest and fees. Now if you know you’re going to have trouble paying for this on time, you can “roll over” the loan and file for an extension, which will trigger an additional fee. The interest charged on payday loans is often 300 percent or more, making them a poor choice when you’re already short on cash.

Alternatives To Bad Loans and Quick Cash

All this sounds scary enough for you? There are better approaches to digging yourself out of a tough financial hole, including:

1. Find the lowest cost loans available. Try low interest credit cards, balance transfer credit cards or even a lending network like Lending Club (for these options, you’ll need to have good credit to qualify). If you absolutely need access to cash and must take out a loan, find the cheapest loans that you can qualify for. More on how to get a personal loan here.

2. Simultaneously, cut down on spending and go on a strict budget. Admittedly, this may not be an easy solution, but this is the most prudent way to free up or obtain some liquidity without it costing you an arm and a leg. While implementing belt tightening strategies, you could also concurrently pursue additional income opportunities. Finding other ways to make money is my favorite approach to solving this problem.

3. Still insist on getting a quick loan? Then pay it off fast! Now if you’re going to go for the easy cash anyway, make sure you know what it costs you, and try to pay it off as quickly as possible. But you’ve been warned!

Copyright © 2009 The Digerati Life. All Rights Reserved.

{ 14 comments… read them below or add one }

Ellen / MoneyLounge September 23, 2009 at 6:19 am

I appreciate that you did not just say what not to do, but offered some alternatives and tips for how to solve this problem. I believe that the best solution is to just spend within you own means, but as you said, sometimes with emergencies or unexpected events this isn’t possible. Thanks for the info, keep it coming!

Jesse September 23, 2009 at 8:15 am

Awesome awesome post. I find it so hard to believe that people still take these kind of huge hits in their finance. I knew a guy that ran a quick cash place and was amazed to hear the interest rates and that he would see the same people come in again and again trying to dig themselves out of a hole by buying a bigger shovel 😉 It just isn’t worth it!

Craig September 23, 2009 at 8:24 am

I agree with Ellen and like how you offered the alternatives. These should never be options unless absolutely desperate and a one time thing, can really hurt you and can lose a lot of money in the end.

Kevin@OutOfYourRut September 23, 2009 at 8:55 am

This isn’t a loan type, and it won’t help if you need money NOW, but if you have credit problems and can’t get market financing through the usual channels, you have to become self-financing. You have to have a savings account that you build up for moments like these, when loans aren’t available.

Like Ellen at Money Lounge said, “the best solution is to just spend within you own means”. I’d add to that, get a part time job and bank the income, sell any stuff you have that you don’t absolutely need, bank your tax refund, take on a side venture where you an make a quick few hundred or a thousand or two, and bank it all.

There really aren’t many options that won’t force you to do things that move you out of your comfort zone, but there isn’t much choice otherwise.

Silicon Valley Blogger September 23, 2009 at 9:59 am

I agree that the key here is to be PROactive and not REactive. The problem is that many people get into a bind because there is not enough preparation for those eventualities. A couple of my favorite sayings are “make hay while the sun shines” and “save for a rainy day”. I think together, these simple ideas are pretty powerful.

When things are good, build your emergency fund and make it a priority. I think that there are a lot of people who like to “live for the day”. But every little bit of preparation helps. With an emergency fund, there’s no guarantee it will cover you 100% for any emergency that arises (some life changing situations can impact your finances pretty seriously no matter what you’ve done), but something is better than nothing!

Pinjam Wang September 24, 2009 at 7:02 pm

I once took up cash advance through my credit card and it took me a good 2 years just to clear the lot. Obviously, I underestimated the hefty interest rate and it’s compounding features.

Michael September 30, 2009 at 7:17 am

SVB: There is A LOT of wisdom in that advice of being PRO vs. REactive. A little over 2 years ago when banks were still lending and credit wasn’t tight my banker suggested I increase my home equity line (not loan, just the line available) and also set up a line of credit for my business and personal line of credit. I procrastinated a bit because I didn’t really need all of that credit. However her advice was “set it up now, while you can still get it” she knew even at that time the financial collapse was coming. She said when the sh*t hits the fan those that set this up before will be in good shape and those that don’t won’t be able to get it.

Long story short I followed her advice and applied for and received all of the lines she recommended. Reduced some other debts, built up a bit more cash in various accounts and for the most part have been pretty good during this whole economic melt down (minus my stock market hits, which I don’t anyone has avoided.)

Now I had great credit and assets, so I realize that your post was about people that didn’t have those options, but as you point out being proactive vs. reactive still gives you more options. I think if more people took more time to learn financial literacy and plan ahead a lot of this type of mess could hurt a lot less for a lot more people.

While economies like this hurt a lot of people I am of the belief we had to go through this so that people came back to earth and started figuring out how to live within their means and become more thrifty and thoughtful about their finances, which as a nation we clearly weren’t 3 and 4 years ago.

Anil September 30, 2009 at 7:30 am

Can I depend on pawnshop loans? What is the security that I can re buy my property from a pawn shop?

College Student October 5, 2009 at 8:22 am

Great article! And I think you hit the nail on the head with PRO- vs REactive management of one’s finances. Unfortunately, I just don’t think today’s young consumers are taught this lesson very often. Overspending is ingrained so deep in our culture.

In April 2009, Sallie Mae came out with a report on undergraduate student spending, and it found that the average undergraduate student has like 4.6 credit cards (!), and only 17% of those students pay off their 4.6 cards each month (!), and overall, 84% of students stated that they wish they’d been given more comprehensive education in the realm of financial management. (I bet they do).

To avoid post-college credit card debt, I only have a debit card, though ill-managed spending has caused me to overdraw my account once or twice — the overdraft fees acted as a sort of bank-backed payday loan at VERY high rates (how about a $35 fee to draw $50)? That would leave most underworld loan sharks slack-jawed, I bet 😉

Lydia October 9, 2009 at 7:17 pm

Good article. I would also add that it’s really smart to shop around when looking for a payday loan. Since they’re so loosely regulated the rates can vary an insane amount from one lender to the next. Be a smart shopper if you choose payday loans to get fast cash.

mr loan October 30, 2009 at 3:49 pm

This is great advice! Who would have thought that there would be such a consequence !

Dave April 24, 2010 at 2:10 am

Excellent advice on the realities of borrowing quick cash. Desperate measures for desperate times. I agree with Michael in that as hard as the current economic situation has been, it has forced a lot of people back to living within their means. A much healthier and happier place for the long term.

Michelle May 25, 2010 at 11:50 pm

I truly have to agree with spending within your means. Getting loans during an emergency has become unavoidable for people who live paycheck by paycheck, and well, basically that is a huge percent of people. Having an emergency fund may be really difficult to scrape out from your monthly paycheck, but it may be worth it in the long run. Definitely much better than the interest rates you may end up paying in getting a loan.

John September 2, 2010 at 12:34 pm

I agree with what you mean. Very good article with good tips!

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