4 Finance Options to Avoid Like the Plague
By Janna on Oct 15, 2008 in Credit Cards, Financial Planning
When you watch your bills pile up month after month, it can be tempting to take advantage of short-term loans or other quick-fix financial options. But some of these tactics will leave you deeper in debt than when you began. To give yourself a fighting chance, avoid these four dubious debt solutions; they’re just not worth the cost.
Fee Harvesting Credit Cards
These subprime credit cards are designed for people with poor credit ratings. They’re often the last resort for potential card holders who need credit, but can’t qualify for traditional credit cards. True, they can help you build your credit history, but at what cost?
Imagine applying for and receiving a $500 credit line. That’s not too bad until you factor in the $250 account setup fee, $90 annual membership fee, and $40 monthly usage fee. Sadly, those numbers are typical of the most predatory fee harvesting cards available. Some applicants end up paying more than their line of credit is worth.
If you’re in the market for a subprime credit card, be sure to shop around for one with minimal fees.
Payday Loans
These loans are cash advances that you must repay in a short amount of time – usually two weeks. The really horrific element is the interest; expect to pay $2,000 or more for the questionable privilege of borrowing $1,500. It’s not uncommon for payday loan borrowers to fall into a downward spiral of debt when they’re unable to repay the loan on time. They borrow more money, fall short again, and borrow still more, all at exorbitant interest rates.
Never, ever take out a payday loan. If you’re having a financial emergency, it’s far better to borrow from friends or family members than to accept money from a payday lender.
Credit Card Cash Advances
When you need money fast, it’s tempting to take out a cash advance through your credit card. But stop and take a moment to decide if this is something you really need to do. Different interest rates apply to cash advances than apply to regular purchases. You might use your credit card to pay your electric bill at an interest rate of 12%, but if you get a cash advance to pay the same bill, you can expect to pay 25-30% interest.
The costly interest rates of cash advances will keep you in debt longer than necessary. If you have to charge something, go ahead and charge it. But leave the cash advance option alone.
Your 401K
Cashing out of your 401K plan before age 59 ½ is a fast way to drain your retirement funds. Premature withdrawals will result in hefty fees, penalties, and taxation. No matter your age, it’s best to leave your 401K alone until you’re ready to retire. If you want an account that you can call upon in tough financial times, get a traditional savings account or put your money into a ROTH IRA which doesn’t penalize you for cashing out.
On Oct 16, 2008, Jeff Kursman said:
Your understanding of payday loans is wrong and the example you use is extremely exaggerated. First, the average fee is about $15 per $100 loaned. In your example, the fees would be $225 for a $1500 loan. Second, the average loan is less than $500. That results in about $45 in fees for a $500 loan over a two week period.
Payday loans are less expensive than bounced checks, fees utility companies charge to re-connect service, and credit card late fees. Payday loans are a good option for short term solutions to short term financial problems for many people.
On Oct 31, 2008, Landa said:
Of course, payday loans aren’t for everyone but they should remain an option for those who wish to use them responsibly. Unfortunately, many aren’t afforded the luxury of borrowing from friends or family in the midst of an emergency. Ruling out every option for a cash strapped individual without offering alternative solutions provides no ease for a consumers situation. Especially, in today’s economic conditions where job loss has become a phenomenon and financial options are dwindling away rapidly.
On Nov 5, 2008, Payday Lending Rep said:
Going along with Jeff and Landa’s comments above, payday advance costs are fully disclosed to customers on poster-size displays in every CFSA member company location. They are also discussed with customers who are contemplating taking out a loan. Your allegation that customers get lost in a cycle of debt is invalid. Under our Best Practices, any customer who cannot payback their loan when due has the option of entering into an extended payment plan, allowing them to repay the loan over a period of additional weeks. This option is provided to customers for any reason and at no additional cost.
Borrowers are not reported to credit agencies if they are unable to repay the loan, nor are they subjected to criminal prosecution. It is likely that their loan is charged off by the payday advance company and most likely the customer would not be able to obtain another payday advance.
On Nov 13, 2008, Janna Weiss said:
The payday loan example I used was from real life; I borrowed $1500 from an online lender in a time of emergency. When I repaid the loan two weeks later, I ended up repaying more than $1750. So I stand by my statements.
Here’s some more news about the payday loan industry and how shady they are:
http://money.cnn.com/2008/11/13/news/companies/payday.ap/index.htm?postversion=2008111307