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.
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.