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.
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.
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.
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.)