As the economy remains shaky and banks are tightening up on their borrowing criteria, many consumers find themselves looking for new sources of funding. While some avenues are straightforward and understandable, some have high interest rates, fees and charges - some of which are not obvious at first glance. Here are the four worst ways to borrow money.

SEE: 3 Tips For Using Payday Loans

Payday Loans

These are short-term loans based on a percentage of your next paycheck. You must bring in a paystub to prove that you are gainfully employed and the lender may perform a credit check. The danger of these loans is that it is easy to get into a borrowing cycle that is difficult to get out of. Paying off the loan with your paycheck may chew up most of it, necessitating a new payday loan against your next check. There is little regulation in this industry and the fees can be steep as there is no security backing the loan.

Title Loans
If you own your car free and clear, you may be eligible for a title loan if the car still has value. The lender holds the title to the car until the loan is repaid in full. While this is a fairly easy way to get small amounts of cash (usually up to $5,000 maximum), the loan comes with high fees along with a high interest rate. The minimum monthly payments required often don't include any principal paydown, so it is easy to maintain a high balance and pay more in interest. Because this type of loan is secured by the title to your vehicle, you may lose it if you default on the loan. (To learn more, read Car Title Loans: Good Option For Fast Cash?)

Pawn shops are a source of fast money for those in dire straits. You leave something valuable as security for the loan and the pawnbroker can sell it if you do not repay the loan. The benefit for those with poor credit is that the pawnbroker won't run a credit check because the loan is fully secured. The downside is that the fee and interest rate charged make these loans one of the most expensive methods of borrowing available.

Reverse Mortgages
These misnamed loans (after all, they are simply mortgages) are advertised heavily to seniors who have equity in their homes but not the income to qualify for a conventional mortgage. Often, these are even touted as a way to pay conventional mortgage payments still existing on the house. The loan amounts accumulate until the borrower dies or sells the house and then full payout is required. The fees and accrued interest often drain the equity out of a house and leave the heirs with a difficult financial situation. This is even truer today when many properties have mortgages larger than the value of the home.

The Bottom Line
There may be times in life when borrowing from an alternative source makes sense. However, reviewing the terms and conditions of the loan and knowing all of the associated fees and interest can help you avoid the dangers of consumer loans. While there are less risky places from which to borrow, there are also predatory lenders who can make your financial situation worse than it was to begin with. (For help on loans, check out How To Spot A Predatory Lender.)

Related Articles
  1. Budgeting

    Best 5 Money-Saving Tips to Get out of Debt

    Understand the different types of debt and the reasons why people get into debt. Learn about five tips to follow to get out of debt.
  2. Credit & Loans

    Mortgage Broker vs. Direct Lenders: Which is Best?

    There are key differences between mortgage brokers and direct lenders. Here's how to choose which is best for you.
  3. Economics

    What Happens in a Default?

    Borrowers are in default when they don’t honor a debt, whether their failure is intentional or not.
  4. Budgeting

    The 7 Best Ways to Get Out of Debt

    Obtain information on how to put together and execute a plan to get out of debt, including the various steps and methods people use to become debt-free.
  5. Credit & Loans

    How To Boost Your Credit Score To Save Thousands

    One of the first steps you should follow before buying a home is to boost your credit score. And how do you do that? Here, we tell you how.
  6. Credit & Loans

    What's a Bridge Loan?

    A bridge loan is a loan that “bridges” a borrower over a temporary shortage in funds on hand.
  7. Credit & Loans

    Understanding Your FICO Score

    Lenders use the FICO score to assess a loan applicant’s credit risk.
  8. Credit & Loans

    Personal Loans vs. Car Loans

    How to tell whether a personal loan or a car loan is better for you.
  9. Credit & Loans

    Calculating Interest Expense

    Interest expense is the cost of borrowing money.
  10. Credit & Loans

    Explaining Credit Ratings

    A credit rating is a third-party assessment about the creditworthiness of an individual or entity.
  1. How does a bank determine what my discretionary income is when making a loan decision?

    Discretionary income is the money left over from your gross income each month after taking out taxes and paying for necessities. ... Read Full Answer >>
  2. When capitalizing interest, will interest accrue while you are in a deferment?

    When capitalizing interest, interest accrues while a person is in a deferment of his loan. In the event of a deferment, the ... Read Full Answer >>
  3. Why is more interest paid over the life of a loan when it is capitalized?

    More interest is paid over the life of a loan when that interest is capitalized because the capitalized interest is added ... Read Full Answer >>
  4. What are some examples of simple interest loans?

    Two good examples of simple interest loans are simple interest car loans and the interest owed on lines of credit such as ... Read Full Answer >>
  5. How can I use the correlation coefficient to predict returns in the stock market?

    Simple interest is most commonly seen in short-term loans, such as those from payday lenders or pawn shops. You might see ... Read Full Answer >>
  6. What is the difference between secured and unsecured debt?

    The difference between secured and unsecured debt is the presence or absence of collateral backing. Secured Debt For a debt ... Read Full Answer >>

You May Also Like

Trading Center
You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!