What happens if you are hit with an expense that you can’t afford, and your emergency fund just isn’t up to scratch yet? Chances are that you will turn to a source of quick cash to make up the deficiency.
Unfortunately, these sources of quick cash are among the worst possible ways to fund your emergency. Here are 3 of the more expensive sources of quick cash:
Bring in a pay stub or a checking account statement, and you can receive a payday loan. This is a loan that is designed to hold you over until payday comes again. You write a check for the amount of money that you want, plus a fee for the loan. You are given cash. The payday loan place promises to hold the check until after you have been paid and there is money in your account.
If you feel like you won’t have enough money when the loan comes due, you can pay another fee and ask the payday loan place not to collect on the check. You either get the old check back (destroy it) and write a new check, or the check is held for another pay period.
Payday loans can be quite costly. In many cases, when the fee is translated into an annual percentage rate, it ends up being more than 200%.
Car Title Loans
If you own your car, you can get a loan using the vehicle as collateral. You allow the lender to hold the car title, and you receive a loan for an amount that is usually a little less than the value of your car. As long as you make regular payments, your car is safe. The title is yours again when you pay off the loan. However, if you begin missing payments on your loan, the lender can repossess your vehicle in lieu of payment on the loan.
The interest rate on these loans can be rather high. However, the fact that there is some security involved (your car) means that you probably won’t have to pay as high a rate as you would with car title loans.
Tax Refund Anticipation Loans
There are some lenders that will offer you a loan based on a tax refund you have coming. Indeed, some tax preparation companies offer these loans to you. Don’t be fooled by a preparer that offers an “early” refund; it’s really a loan.
The fees on these loans can be rather high, and can reduce the value of your tax refund. With E-file in the United States, and NETFILE in Canada, it’s possible to get your tax return processed faster, and a refund fairly quickly. There’s not much need for a tax refund anticipation loan these days.
What to Do Instead
Instead of turning to these expensive sources of funding, look for alternatives. One of the best things you can do is be prepared for a financial emergency with a fund set aside for that purpose. However, if your emergency fund can’t handle your problem, there are some other options you can consider first.
Your friends and family can be one source of funds if you need help. When I was in college, I was too proud to ask my parents for help, and ended up getting a payday loan to cover the rent when I started a new job and hadn’t received a paycheck yet. I paid it off quickly, but it was an experience I didn’t want to repeat. A few years later, when I was in a tight spot, I swallowed my pride and asked my parents for a loan. Again, I paid the money back quickly, but the experience was much more pleasant.
If you have friends and family you can turn to, try that first. You can also look into community resources. If you need help with bills or food, there are often community organizations that can provide that type of aid. You can then use any available money as needed. If your problem is temporary, you can also attempt to contact those you owe. In some cases, you can defer payment and set up a payment plan if you are experiencing hardship.