7 of the Dumbest Ways to Borrow Money

Unhappy borrowers
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The coronavirus pandemic has created a tsunami of economic destruction. Tens of millions of folks are now unemployed, and many of them are scrambling for money to pay the bills.

However, it’s a mistake to let financial fears override your judgment. Some loans are almost always a bad deal. When it comes to wasting money, few things are worse than giving your cash to high-interest lenders, pawnbrokers or loan sharks.

Following are some of the worst types of loans.

1. Payday loans

Payday loans are generally small, high-interest loans repaid from your paycheck.

They have a bad name partly because their fees are high. Some states limit these fees to $10 to $30 for every $100 you borrow, according to the Consumer Financial Protection Bureau (CFPB). But that is still high.

For a typical two-week payday loan with a $15 fee per $100, that fee equates to an annual percentage rate (APR) of almost 400%. That makes even credit card APRs — usually between 12% and 30% — look good.

2. Auto title loans

With these short-term, high-cost loans for small amounts, you hand over the title to your vehicle and pay a fee of up to 25%, according to the Federal Trade Commission. For example, if you borrow $1,000 for 30 days at 25%, you would owe a total of $1,250 in a month, including $250 in costs.

You often have 30 days to repay. If you miss the loan due date, the lender may seize your vehicle or renew your loan.

The latter is more common, according to a CFPB study. It found that more than 4 out of 5 vehicle title loans are renewed the same day they are due because borrowers are unable to repay the loans in a single payment.

The CFPB continues:

“More than two-thirds of auto title loan business comes from borrowers who wind up taking out seven or more consecutive loans and are stuck in debt for most of the year.”

3. ‘Buy here, pay here’ car dealerships

So-called “buy here, pay here” auto dealerships offer loans to borrowers who can’t qualify for regular car loans. “Bad credit? You can still get a car,” an ad might say.

These loans tend to carry much higher APRs than bank or credit union loans, according to the nonprofit Center for Responsible Lending. They also generally come with high upfront fees and require borrowers to put down what the center calls “a disproportionate percentage of the car’s actual value.”

4. Credit-card cash advances

Turning to your credit card for cash will cost you. You will often pay an upfront fee for the cash advance, and interest starts accruing immediately.

Interest rates also tend to be higher than they are for credit-card purchases.

5. Pawnshops

Some pawnshops will loan you money in exchange for receiving certain valuables as collateral. If you don’t repay the loan, the shop keeps your goods.

This is an expensive way to borrow money for two reasons: high interest rates and high fees.

Even if the interest rate sounds low, find out all the fees involved. For example, you may be asked to pay storage costs and insurance fees.

Also, ask yourself if you might be willing to part with your treasures permanently. If so, you could make more money if you sell them on eBay.

6. Friends and family

Borrowing from family or friends is a risky idea for reasons you probably already know. A debt can unbalance and damage even the best relationship. Ask yourself: Would you rather have the money or the friend?

7. Tax refund loans

The Center for Responsible Lending calls tax refund loans “instant trouble.”

By rushing to get your hands on your refund, you could end up throwing away more than 10% of it on interest and fees — such as electronic filing fees and a charge for cashing your loan check. “Extremely high” interest rates are not unheard of, the center says.

Here is a better idea: Put that money back into your paycheck, so the federal government isn’t holding it for you. To do this, adjust your federal tax withholding. The IRS withholding calculator can help taxpayers determine whether they should adjust their withholding.

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