The 7 Dumbest Ways to Borrow Money


What's Hot


2 Types of Black Marks Might Vanish From Your Credit File SoonBorrow

6 Ways the Obamacare Overhaul Might Impact Your WalletInsurance

7 Dumb and Costly Moves Homebuyers MakeBorrow

This Free Software Brings Old Laptops Back to LifeMore

Obamacare Replacement Plan Gets ‘F’ Rating from Consumer ReportsFamily

Beware These 12 Common Money MistakesCredit & Debt

21 Restaurants Offering Free Food Right NowSaving Money

17 Ways to Have More Fun for Less MoneySave

House Hunters: Beware of These 6 Mortgage MistakesBorrow

30 Household Uses for Baby OilSave

25 Ways to Spend Less on FoodMore

Nearly Half of Heart-Related Deaths Linked to These 10 Foods and IngredientsFamily

5 Surprising Benefits of Exercising Outdoors in WinterFamily

10 Ways to Save When You’re Making Minimum WageSave

Boost Your Credit Score Fast With These 7 MovesCredit & Debt

7 Painless Ways to Pay Off Your Mortgage Years EarlierBorrow

The Most Sinful City in the U.S. Is … (Hint: It’s Not Vegas)Family

The True Cost of Bad CreditCredit & Debt

10 Companies With the Best 401(k) PlansGrow

This Scam Now Tops ID Theft as the No. 2 Consumer ComplaintFamily

6 Stores With Awesome Reward ProgramsFamily

6 Ways to Save More at Lowe’s and The Home DepotSave

6 Healthful Treats for Your DogFamily

New Study Ranks the Best States in the U.S.Family

Thousands of Millionaires Moving to 1 Country — and Leaving AnotherGrow

Strapped for College Costs? How to Get the Most From FAFSABorrow

6 Overlooked Ways to Save at Chick-fil-AFamily

Ask Stacy: What’s the Fastest Way to Pay Off My Mortgage?Borrow

Where to Sell Your Stuff for Top DollarAround The House

8 Ways to Get a Good Price on a Shiny New AutoCars

Ask Stacy: How Do I Start Over?Credit & Debt

Secret Cell Plans: Savings Verizon, AT&T, T-Mobile and Sprint Don’t Want You to Know AboutFamily

30 Awesome Things to Do in RetirementCollege

14 Super Smart Ways to Save on TravelSave

The Rich Prefer Modest Cars — Should You Join Them?Cars

You’ll Soon Pay More to Shop at CostcoSave

10 Ways to Save When Your Teen Starts DrivingFamily

In a bind? Borrow from these lenders and you'll probably end up worse off.

Borrowing money is risky business. Sure, if you’re a combination of smart and lucky, the transaction may go smoothly and help you out of a bind. But seek help in the wrong place you could be living the ultimate financial nightmare: the never-ending loan.

Which lenders should be considered a last resort? In the video below, Money Talks News founder Stacy Johnson reveals some of the worst ways to borrow money and why you should avoid them. Check it out and then read on for more.

Now let’s delve into a bit more detail…

1. Payday loans

Payday loans are small short-term loans backed by your paycheck. Here’s how they work: You apply for a payday loan, listing your next two or three pay dates on the application. After getting approved, you write a postdated check for the loan amount plus interest and fees. On your next payday, the lender collects the balance due, or you can choose to “rollover” your loan until your next payday.

Payday loans appeal to people because they seem fast and easy. Most payday lenders don’t consider your credit history, so people with bad credit can still get approved as long as they have a source of income. And many lenders will give you the cash in just a few days, or hours in some cases.

But these loans come with a catch – high interest rates and fees. For example, Credit.com’s list of payday loan laws by state lists the maximum interest rate lenders can charge. Check out some of these terms:

  • Alabama – 17.5 percent
  • Colorado – 20 percent of the first $300, 7.5 percent for the remainder
  • Louisiana – 16.75 percent

These interest rates may not appear excessive – they seem similar to credit card rates. But credit cards quote the amount you’ll pay over a year, while payday lenders collect their interest in as little as a week. Annualize rates like those above and you’re paying triple-digit interest. Florida law, for example, allows only 10 percent interest, plus a $5 fee for loans from seven to 31 days.  Do that for a year and you could be paying nearly 400 percent.

Therein lies the danger of the “rollover.” Many lenders allow customers to extend their loan to the next payday if they pay the fee plus any accrued interest. Since they’re not reducing principal, it’s easy to become trapped.

2. Pawnshops

Pawnshops lend you money by holding your stuff as collateral. But as far as rates go, they’re not much different from payday lenders. Loans are typically 30 to 90 days, and rates and storage fees can be 10 to 20 percent per month. If you can’t pay the loan when it’s due, the shop can sell your collateral, which is generally worth a lot more than the loan amount.

Despite the popularity of pawn-based reality shows, these places are no place to borrow money – or sell your stuff, for that matter. If you need to borrow money, there are much cheaper ways to do it. If you need to sell stuff, you’re better off cutting out the middleman and using a site like eBay or Craigslist.

For more, see Despite TV’s Obsession With Pawnshops, They’re Still Last Resort.

3. Cash advances from credit cards

While cash advances from credit cards beat payday loans and pawnshops, they’re no bargain.

You can borrow up to your credit limit and get the money instantly, either by swiping your credit card in an ATM and entering your PIN, or by using one of those blank cash advance checks the credit card company sends in the mail.

Banks can charge up to 25 percent annual interest on cash advances, along with fees from 3 to 5 percent of the amount borrowed. In addition, unlike regular credit card purchases, you won’t get a grace period. The interest clock starts ticking on day one.

4. Buy-here-pay-here car dealerships

Every day I pass a shady-looking car dealership in my neighborhood. Their sign screams “No one is refused!” Every day a salesman stands outside holding up a different ad, like “Bad credit approved” or “Get a car for no money down!” Last week, the sign read, “Trade your old gold for a car!” This is an example of a buy-here-pay-here car dealership. They’re everywhere – according to the Center for Responsible Lending, more than two million cars were sold this way in 2010.

These dealerships often begin the sales process by looking not at cars, but your income and credit. Only when they learn what you can afford are you shown cars. Sign on the dotted line and you could be paying average annual interest rates of 24 percent. As Stacy said in the video above, that’s three to four times the rate of typical used-car loans. And that’s not all: The Center for Responsible Lending says 30 percent of these cars are repossessed and resold, and according to CNNMoney, some of these dealers repossess cars when the borrower is one day late.

In short, many of these lots aren’t really in the business of selling cars – they’re in the business of collecting interest. Lots of it.

5. Title loans

Like pawnshop loans and payday loans, title loans are small, short-term loans. The difference is these are backed by your vehicle. Since you’re putting up collateral, most lenders won’t consider your credit history. It seems appealing until you realize you’re handing over the title to your car for a loan that comes with extremely high interest. For example, The Los Angeles Times reported one lender in California charges an annual interest rate of up to 125 percent.

6. Direct deposit advance

Believe it or not, many banks now offer what amounts to payday loans. Your bank advances you a portion of your paycheck (for a fee) and then withdraws the money automatically the next time you get paid.

Direct deposit advances are a quick way to get cash, but as with payday loans, they can cause major financial troubles. First, you’ll pay a fee. For example:

  • USBank – $2.00 for every $20.00 borrowed
  • Wells Fargo – $1.50 for every $20.00 borrowed
  • Regions – $1.00 for every $10.00 borrowed

According to the Center for Responsible Lending, the average bank direct deposit advance carries an annual interest rate of 365 percent. As with payday loans, those living paycheck to paycheck can easily run out of money before the next payday and be tempted to take out another advance, putting them in an endless debt cycle.

7. Friends and family

Borrowing money from someone you know is tempting. After all, most family members wouldn’t charge you interest or take your car if you don’t pay them back. The problem? You’re risking your relationship if the deal goes bad. As Addison H. Hallock once said, “Before borrowing money from a friend, decide which you need more.”

The bottom line? Borrow money from any of these lenders, and your small problem today might become a huge problem tomorrow. Instead, consider building up an emergency fund to handle unexpected events. For tips on how to get started, check out:

Stacy Johnson

It's not the usual blah, blah, blah

I know... every site you visit wants you to subscribe to their newsletter. But our news and advice is actually worth reading! For 25 years, I've been making people richer without making their eyes glaze over. You'll be glad you did. I guarantee it!

💰🗣📰

Read Next: 8 Great Travel Freebies You Can Get in 2017

Check Out Our Hottest Deals!

We're always adding new deals and coupons that'll save you big bucks. See the deals to the right and hundreds more in our Deals section.

Click here to explore 2,019 more deals!