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.
Those things can definitely make you go broke really quickly. Unfortunately some catch themselves in a vortex with expensive money, and it’s hard for them to get out. There are alternatives – I just wish most people would see that BEFORE they end up paying 25% interest.
I just posted an article this morning about payday loans and that they are evil. I am not a huge fan of borrowing money either. It just makes me feel uncomfortable around that person I owe like they are judging me or something. Granted, I haven’t had to borrow from a person in a long time, I just remember how it made me feel.
Instead of payday loans I think opting for a traditional pawn style loan is a much better option!
If ever I need extra cash, I will probably ask my family for help, but not friends. One of the things I try to avoid when it comes to friendship is to make money an issue that can create a gap between me and a friend. As for those other loans, making sure that you always have an emergency fund to tide you over will certainly help prevent you from making them an option to consider.
Getting a payday loan is just asking for trouble in my opinion although there have been people who have used the services and got out safe. It’s a cycle that once someone starts is tough to get out of. I personally would not use these services.
Interesting insight about tax anticipation loans. Great post, Miranda.
I wouldn’t necessarily advise taking out a loan from a friend, because it tends to put a strain on your relationship with that person. On the other hand I really don’t advise using things like cash advance, and especially not western sky!
Yes, Miranda, Family and friends can be more helpful at times of an emergency rather than taking all the loans mentioned above and increase amount of indebtness on you, you should first turn to the Family and if not possible to get help from them turn to the friends ultimately keep taking loans as lender of last resort, if nothing works it will work for you.
These quick cash methods are always a horrible deal. Like you said, it’s great to put aside some money for emergencies if at all possible. I do this so that I don’t get taken advantage of by the “quick cash” companies.
Aww this can really hurt a lot. You can go broke in an instant. If you are not sure that you can pay it quickly, better not do it at all. I believe there are other options out there.