When it comes to wasting money, few things are worse than giving your cash to high-interest lenders, pawnbrokers and loan sharks.
At least when you gamble, you get some entertainment. With a high-interest loan, you just shovel money — and lots of it — into someone else’s hands.
Here 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 can run as much as $10 to $30 for every $100 you borrow, according to the Consumer Financial Protection Bureau (CFPB).
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 percent. That makes even credit card APRs — usually between 12 percent and 30 percent — look good.
Payday loans typically are due in full from your next paycheck. In some cases, a borrower may be able to repay the loan in installments or pay a fee to postpone the loan due date, known as renewing or rolling over a payday loan.
These options only make payday borrowing more expensive in the end, though. For example, the CFPB explains:
“If you roll over the loan multiple times, it’s possible to pay several hundred dollars in fees and still owe the amount you borrowed.”
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 percent, according to the Federal Trade Commission. For example, if you borrow $1,000 for 30 days at 25 percent, you’d 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 in 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. The costs generally start immediately.
You will often pay an upfront fee for the cash advance, and interest starts accruing immediately — no 30-day grace period like cardholders usually get for credit-card purchases.
Interest rates also tend to be higher than they are for credit-card purchases.
5. Pawn shops
Some pawn shops 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, be sure you know all of the fees involved. For example, you may be asked to pay a storage fee or a ticket fee — and an additional fee if you lose your receipt.
Also, ask yourself if you might just be willing instead 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 percent of it on interest and fees — like electronic filing fees and a charge for cashing your loan check. “Extremely high” interest rates are not unheard of, the center says.
Here’s 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 post-tax reform whether they should adjust their withholding.
If you are thinking about using any of the loans above, chances are good that your back is against the wall. Here are better options:
- Look at your credit score: Don’t assume your credit is bad. Bad loans often are sold to people who could qualify for cheaper products. Read “How to Get Your Credit Report in 6 Easy Steps.”
- Try credit counseling: The alternative to high-interest loans is getting control of your financial life. No one is saying it’s easy, but many people have done it with free counseling from a nonprofit credit counseling agency.
- Try our Solutions Center. You can also search our Solutions Center and find help with credit card debt, as well as tax debt and student loan debt. We also can point you to help for restoring your credit.
- Learn the APR: When you’re shopping for any loan, find out the APR and be sure to learn all costs and fees. Comparison-shop for loans by comparing APRs. The lowest APR is the best deal.
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