There are a lot of ways to borrow money and not all of them are created equally. The better your credit, the better your options obviously. For those with bad credit, lending choices are not always that great. Let’s take a look at some of the most expensive ways to borrow money.
Payday Loans
Payday loans, also sometimes referred to as cash advances are tops on the list. They have some of the highest annual percentage rates around, mainly because of the very short loan term.
Most lenders do not actually charge an interest rate but instead charge a fee per 100 dollars borrowed. It could be anywhere from 15 to 30 dollars, so a 300 dollar loan, for example, might have a fee of 45 to 90 dollars attached to it. You borrow 300 dollars and pay back 345 to 390 on the predetermined date.
On the surface, that might not seem to bad but then you calculate the APR. The APR is the effective interest rate if a loan would be for a full years term. Because these loans are short, typically 7 to 14 days, the effective interest rate or APR is sky high. It i usually over 400 percent and can exceed 1000 percent in some circumstances. Very costly.
Using A Payday Loan
If you decide that you must take out a payday loan to get by, be careful and follow a few rules.
First, make sure that you have the means to pay the loan back. Do not just assume that the money will be there when the loan comes due.
Second, take out the very minimum that you need to get by. You might be approved for 700 dollars, but if you can squeak by on 300, do so.
Lastly, shop around. There are no set fees. There are many times limits that lenders must work within but every lender has different fees and even loan terms.
Title Loans
Title loans can be for more money than a payday loan because they are secured loans. You place the title of you vehicle down as collateral for the loan. This means that a lender is able to provide you with more credit, even if your credit score is not so good.
This also means if you do not pay back the loan, the lender could potentially take your vehicle. In reality, lenders do not want to do that but they will renew the loan if you can not pay it back and this will cost you a lot more money in loans and fees. Push come to shove though, they will take your car or truck if you do not pay the loan.
Now, you might think that because a title loan is secured that it would come with lower fees, but this is not the case. Title loans come with interest which is often limited by state regulations and fees that are not as regulated. This makes the APR of the average title loan somewhere between 200 and 300 percent.
Using A Title Loan
The rules to safely working with a title loan are very similar to borrowing with a payday loan. If you need cash now and must take one out, here are some things to keep in mind.
First, make sure that you have the money to pay back the loan on time. If you do not have the money when the loan is due, you could face additional fees from a loan renewal or you could face loss of your vehicle.
Second, keep in mind that more money comes with more fees, so take out just what you need.
Credit Card Cash Advances
Every credit card comes with a separate limit that you can use for cash advances. Just take your credit card to a bank teller or an ATM and you can get cash in hand to handle any emergency that you need.
The problem with cash advances is that they come with a much higher interest rate than regular purchases. If your regular rate is 13 percent, your cash advance rate could be 25 percent or even higher. In addition, you might face fees both from your credit card issuer and from the ATM or bank you use to get your money.
Using A Credit Card Cash Advance
Compared to a payday or title loan, the rates and fees from a credit card advance are rather reasonable. Having said that, they are still quite high and are not the greatest way to handle a financial problem.
If you must use a credit card to handle an emergency, try to pay with the card directly. Even if there is a transaction fee, it would still be cheaper, in most cases, than the interest that would be charged from a cash advance.
Also, instead of using a cash advance from your card, consider paying another bill that you would have paid cash for with your card, such as an electric or water bill. Then use the money that you would have used to pay for that to handle your cash emergency.
When an advance is absolutely needed, take out the smallest amount possible
Friend Or Family Loan
A relative with money is a great thing. You can borrow money without fees or interest. Also, with the advance of transfer services like Zelle, you can get money almost instantly, no matter where they live. It seems like the perfect solution.
The problem with a loan from someone you care about is that you can lose much more than money, you can lose the relationship. People have a lot of emotion tied up in their money. They worked hard to get it and if they think you are at all taking things for granted, they will get offended.
Using A Friend & Family Loan
If this is the direction that you go with, use caution. The key is to take the loan as seriously as you would a loan from a bank.
To accomplish this, you need documentation. It might seem cold to have a loan contract between friends, but it is for the better good. Spell out how much is borrowed, how much is to be repaid and at what interval the payments are to be made.
When you do make payments, be sure to document them. Pay the money back with checks or electronic transfers. That way, you can prove that you paid back the loan if things ever get fuzzy. People do not always remember things the same way, so it is good to get it in writing.
Wrapping Up
When you have bad credit, money does not always come cheaply. Unfortunately, sometimes you need to use costly lending methods. If you do, be sure to go in with your eyes wide open and take the appropriate precautions. The only thing worse than needing money is being stuck in a loan that you can not afford.
