Avoid These Three “Short-Term” Loans

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by carrying that balance from month to month, cash advances are typically charged an additional fee based on the amount withdrawn. Most credit cards charge 3% of the advance and add that to the amount withdrawn.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)

 Banking, Credit, Debt 

Pay Day Loans Have Equally Bad Financial Friends

Pay day loan shops (and cash checking and other similar short term loan shops) are often singled out as places that prey on consumers in a tight spot. While I don’t dispute that, I want to point out other places that also prey on consumers in a tight spot that don’t often get the spotlight.

Pay Day Loans Are Bad

Don’t get me wrong, pay day loans are horrible products for consumers because of their high fees, high interest rates, and their propensity to become financial sinkholes. It’s the financial version of someone going in for a routine cavity filling and coming out with a lobotomy. You just need a little extra help to get you to the next pay day but end up paying for years. According to this warning by the FTC, they give an example in which “the cost of the initial loan is a $15 finance charge and 391 percent APR. If you roll-over the loan three times [42 calendar days], the finance charge would climb to $60 to borrow $100.” $15 to start and 391% APR is horrible but let’s compare to some of these other products.

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Don’t Get A Refund Anticipation Loan

Every year millions of hard working Americans will walk into a tax preparers office to get their taxes done. A small subset of those hard working Americans will agree to a tax rebate loan, sometimes called a refund anticipation loan, without fully understanding how ridiculously expensive they are. Sometimes they aren’t well informed, sometimes they are simply strapped for cash, sometimes they just don’t do the math and don’t realize they’re getting the short end of the stick. Ultimately I believe the responsibility falls on the consumer to understand it because the tax preparation companies disclose everything. They tell you exactly what you’re paying, they don’t make the information difficult to find (I found H&R Block’s RAL information within two minutes), and it’s always on the consumer to be aware of what he or she is signing.

That being said, I feel that it’s my responsibility to at least write a little about how absolutely ridiculous these types of loans are. According to the IRS, if you e-file and select direct deposit as one of your options, you should get your refund in an estimated 8 to 15 days. Eight to fifteen days. That’s it! You could file right this second and get your refund in time to make rent at the end of the month. That’s how quick it is.

So, in order to get your own money back a little quicker, people are turning to loans? I had no idea how expensive they were until I looked at actual pricing information. Check out this H&R Block Refund Anticipation Loan pricing sheet (I found this in two minutes, no joke). Let’s say you are going to get a $2,000 check directly from H&R Block, rather than waiting the 8 to 15 estimated days it’ll take for the IRS to direct deposit the funds to your account. How much will you pay?

  • Activation Fee: $29.95 right off the bat to even play the RAL game.
  • 36% APR: That’s the interest rate of the loan you’re getting! Thirty-six percent APR! People scream about how credit card companies are predatory and the highest rate they charge, when you start defaulting on payments, is 29.99%! (That’s Citi’s default rate)
  • Check Processing Fee: Another $20 fee to “process” your check.

So, on a $2,000 check they estimate that it’ll have fees of about $71.41, or about 3.5%. $71.41 is the price of a nice dinner for two. $71.41 towards your credit card debt will find you closer to freedom. Paying $71.41 to borrow money from your future self (in 8-15 days too)… that’s an outstanding ripoff. The lower the amount you get back, the more exorbitant the fees look. If your RAL is only for $200, then you’re paying $52.09 in fees which makes it an unfathomable 26%. That’s like me reaching into your pocket and swapping out all your twenty dollar bills with fifteen dollars bills. You think that sounds ludicrous? Think of how many people accept those fifteen dollars bills!

Are you really that strapped for cash? If so, that’s totally understandable. The solution isn’t a refund anticipation loan, the solution is to file your taxes right this very second. You can find an IRS sanctioned tax preparer that will help you prepare and e-file you taxes for free (if you qualify). Then, the next step is to adjust your withholdings so you aren’t over-prepaying your taxes next year. The last resort is a refund anticipation loan.


Refund Anticipation Loans Are Ripoffs

You would think that most people know that payday loans are ripoffs and the ones you use them are either in dire financial straits or think they’re in dire financial straits but as it turns out, a lot of folks don’t realize refund anticipation loans are ripoffs too because they usually are offered by reputable companies like Jackson Hewitt, H&R Block, and other big tax preparer names and not Fast Cash, Check Cashing R Us, or other seedily named joints. However, if you ever look at the fine print, you’ll see fees and interest rates that would make a check cashing shop blush. And an even scarier tactic nowadays is that a lot of these preparation houses don’t even need a W-2, they’re offering paystub loans and you only need to bring in your December paystub in order to apply for these loans.

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