Avoid These Three “Short-Term” Loans

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Payday Loan StorefrontIn an ideal world, when you needed to borrow some money, you could just walk into your bank and just ask. However, banks are funny in that they generally are willing to give you money when you don’t need it but are less forthcoming when you actually need it. In these harder economic times, those in need of money may be tempted to turn towards other “financial institutions” for short term loans and I’m here to try to dissuade you. These are horrible short-term loans with horrible terms (and their high probability of becoming extremely expensive long term loans) and should be your last resort if you’re in need of cash.

“Refund Anticipation Loans”

These are loans offered by tax preparation firms based on your tax return. They offer them because they know exactly how much of a return you’ll be getting, when you’ll be getting it, and how much money they’ll be making by lending you that money a few weeks early. They’re expensive loans, despite how safe they are, and they’re packed with tons of fees. The industry earned over a billion dollars in 2006, I wonder how many of those dollars were earned from folks who didn’t know they were getting a loan in the first place? Probably more than you’d think.

Payday Loans

Need a few extra bucks to make it through to your next paycheck? How about a little extra scratch so you can get a gift that’s extra special? Payday loans typically have ridiculous high interest rates (think four digits and that’s not counting the decimal places) and their fees are atrocious. The scary part about payday loans is that most people only get one for a few hundred dollars so it doesn’t seem like all that much… then they get socked with fees and then something goes bad and then before you know it you’re going down the mountain with one ski and a prayer.

Credit Card Cash Advances

You might be tempted to stick your credit card into an ATM and simply withdraw some money but take heed. In addition to the interest you may pay by carrying that balance from month to month, cash advances are typically charged an additional fee based on the amount withdrawn. Most credit cards charge 3% of the advance and add that to the amount withdrawn. $100 becomes $103 and, if you carry that from month to month, can have a serious impact. A cash advance is not as bad as a RAL or a payday loan.

Better Sources of Short-Term Money

Need money for the short term? Here are some suggestions, in no particular order, that are better than Payday loans but not exactly ideal themselves:

  • Try the bank – you never know.
  • Cut other expenses so you’re spending less.
  • Ask your employer for your paycheck a little early.
  • Borrow from friends and family.
  • Consider peer-to-peer lending sites like LendingClub or Prosper.
  • Use your credit card for purchases and consider a card with 0% APY on purchases promotion. It’s not ideal but will give you more breathing room.
  • If you owe someone money, try to negotiate a deal. Delayed payment beats bankruptcy.

If you’re in good shape now but on the fringe, consider cutting some expenses so you can bolster up the emergency fund. It’s far easier to get money out of a bank account than it is to get it from anywhere else.

Anyone else have any ideas?

(Photo: andrewbain)

{ 5 comments, please add your thoughts now! }

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5 Responses to “Avoid These Three “Short-Term” Loans”

  1. Cap says:

    Don’t forget almost all cash advances will not have a transaction grace period… so the minute you take out a redit card cash advance, you’ll start incurring the interest. Even though they are “not as bad” when compared percentage-wise to refund anticipation loans and payday loans — cash advances APRs are still ridiculously high in the 20s to 30%.

    Avoid all of them as you would a rabies crazed squirrel.

  2. JimmyDaGeek says:

    People need to change their mindset and learn to borrow from themselves. Instead of borrowing and paying interest to someone else for something you want NOW, save the money and buy it LATER. Then, repay yourself with interest as you would with a loan. You’ll be amazed at the money you save.

  3. Yes Jimmy, but saving is so boring. People want to live the glamorous lifestyle of celebrities now, they want flashy cars, expensive trips to nowhere and all the latest ipods, iphones and gadgets.

    Anyways an old saying says that there’s nothing to prevent a fool from parting with his money.. The above mentioned first 3 sources of cash are three such wealth destructors for fools..

  4. AverageJoe says:

    The entire payday lending industry should be highly regulated. By using the word “fees” instead of “interest” they avoid usury laws, but in actuality are charging over 300% APY. Absolutely disgusting.

    The “refund anticipation” loans from tax prep companies are almost as bad. Add up the fees and the interest, and see what the total cost really is on an APY basis. Plus, refunds for those who e-file generally take only 1-2 weeks… much should someone pay to get their money 2 weeks early?

    There are certainly some consumers who are desperate for the money (maybe their facing eviction, or have huge medical bills) but I suspect the majority simply don’t want to wait. I’m also sure that the tax prep employee gets a nice payout for convincing their marks (sorry, customers) to take advantage of an immediate payout….

    In either industry, whether we call it payday lending or tax refund anticipation loans, it’s mere semantics: They are 21st century loan sharks. Stay away at all costs!

  5. mannymacho says:

    I think that apart from greed there’s also a feeling of panic that some people have when looking at their finances to drive them to take these sorts of loans. It’s a sad thing, really…

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