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carrying that balance from month to month, cash advances are typically charged an additional fee based on the amount withdrawn. Most credit cards charge 3% of the advance and add that to the amount withdrawn.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