The 7 Dumbest Ways to Borrow Money

Photo (cc) by Thomas Hawk

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:

Disclosure: The information you read here is always objective. However, we sometimes receive compensation when you click links within our stories.

Read Next
5 Reasons You Should Claim Social Security ASAP
5 Reasons You Should Claim Social Security ASAP

Experts often recommend postponing claiming your Social Security retirement benefits. But there are situations in which you should start taking the money sooner.

21 Purchases You Should Never Skimp On
21 Purchases You Should Never Skimp On

With some items, it makes sense to pay a little more rather than hopping on the lowest price.

How to Avoid Being Surprised by 7 Nasty Expenses
How to Avoid Being Surprised by 7 Nasty Expenses

Major expenses are difficult to predict, but there are ways to make sure you’re protected.

What Brand Makes the Best Rechargeable AA Batteries?
What Brand Makes the Best Rechargeable AA Batteries?

The best battery depends on what you need it for and how big your budget is. Here’s how to find the cheapest brand that will do the job you need.

Stop Overpaying for These 10 Common Purchases
Stop Overpaying for These 10 Common Purchases

The best price for many of these items is “free.”

View this page without ads

Help us produce more money-saving articles and videos by subscribing to a membership.

Get Started

Most Popular
10 Things Frugal People Never Buy
10 Things Frugal People Never Buy

If you’re a true tightwad, the mere thought of spending money on these items gives you the willies.

10 Useless Purchases You Need to Stop Making
10 Useless Purchases You Need to Stop Making

You might as well flush your money down the loo if you spend it on these things.

The 16 Cars Most Likely to Last 200,000 Miles
The 16 Cars Most Likely to Last 200,000 Miles

One automaker takes half the spots on a list of the longest-lasting vehicles.

7 Social Security Rules Everyone Should Know by Now
7 Social Security Rules Everyone Should Know by Now

Confusion over Social Security is a shame, considering how many of us will need this money badly.

9 Shopping Mistakes to Avoid at Costco
9 Shopping Mistakes to Avoid at Costco

Are you missing out on serious savings at your favorite warehouse club?

If You Find This Thrift Shopping, Buy It
If You Find This Thrift Shopping, Buy It

They don’t make coffee makers like this anymore.

11 Products Now in Short Supply Due to the Pandemic
11 Products Now in Short Supply Due to the Pandemic

Many goods we take for granted have become tough to find in 2021.

7 Kirkland Signature Items to Avoid at Costco
7 Kirkland Signature Items to Avoid at Costco

Even if it seems you save a bundle buying Costco’s Kirkland Signature brand products, they may not be the bargain they appear to be.

14 Things You Should Stop Buying in 2021
14 Things You Should Stop Buying in 2021

These convenient household products come with hidden costs that you might not have considered.

3 Ways to Get Microsoft Office for Free
3 Ways to Get Microsoft Office for Free

With a little ingenuity, you can cut Office costs to zero.

Is Writing a Check Still Safe?
Is Writing a Check Still Safe?

Every time you pay by check, you hand your bank account numbers to a stranger.

6 Ways to Protect Your Retirement Accounts From Hackers
6 Ways to Protect Your Retirement Accounts From Hackers

Imagine having $245,000 stolen from your retirement account — and not being reimbursed.

8 Things You Should Replace to Improve Your Life Today
8 Things You Should Replace to Improve Your Life Today

Being frugal isn’t smart if you put off replacing these items.

This Is the Most Dependable Car Brand in the U.S.
This Is the Most Dependable Car Brand in the U.S.

This brand’s vehicles are least likely to give drivers repair headaches, according to J.D. Power.

13 Amazon Purchases We Are Loving Right Now
13 Amazon Purchases We Are Loving Right Now

These practical products make everyday life a little easier.

7 Hidden Sections of Amazon Every Shopper Should Know
7 Hidden Sections of Amazon Every Shopper Should Know

These little-known departments of Amazon are gold mines for deal-seekers and impulse shoppers alike.

7 Income Tax Breaks That Retirees Often Overlook
7 Income Tax Breaks That Retirees Often Overlook

Did you realize all these tax credits and deductions exist — or that they apply to retirees?

7 Social Security Benefits You May Be Overlooking
7 Social Security Benefits You May Be Overlooking

There’s more to Social Security than retirement benefits.

The 6 Best Investing Apps for Beginners
The 6 Best Investing Apps for Beginners

If you’re looking to ease into investing in the coronavirus economy with just a little money, check out these easy-to-use tools.

View More Articles

View this page without ads

Help us produce more money-saving articles and videos by subscribing to a membership.

Get Started

Add a Comment

Our Policy: We welcome relevant and respectful comments in order to foster healthy and informative discussions. All other comments may be removed. Comments with links are automatically held for moderation.