When you’re in a tough financial position, need to pay a large bill or have an expensive emergency, it might be tempting to take the first offer of cash that comes your way. But be wary of quick fixes, which can often come with hidden costs that make it difficult to pay back the amount you borrowed.
If you need funds fast, there may be more options available than you think. A personal loan lets you borrow a specific amount of money with fixed payments, longer repayment terms and typically a fixed interest rate.
Before seeking any type of quick cash, it’s important to understand the terms and costs involved. In this article, we’ll discuss what to avoid.
Don’t take out a loan you can’t afford
As tempting as it may be to find a fast solution to a financial challenge, certain types of loans can be extremely expensive in the long run and may put you at risk for significant debt.
Payday loan
Payday loans are marketed as a quick solution if you need cash, since you can typically be approved for the money within minutes. However, payday loans are risky. Payday loans are generally short-term loans that use your next paycheck as the lender’s security. You will need to repay the loan in full within just a few weeks, plus up to 30% of what you borrowed in interest and fees.
Payday loans may be easy to qualify for, as they typically don’t require credit checks, but the risks for both the lender and borrower are high. You typically have to provide a check for the amount of the loan and fees or authorize a debit for the full amount from your bank account. If you don’t repay the loan on time, the lender can simply cash the check or withdraw the funds. If you don’t have enough to repay the loan, it’s common to roll it over, which will mean incurring more costs.
Title loan
Another quick-cash option is a title loan, using your car as collateral. Collateral is something of value you own that a lender can take if you can’t repay the money. A title loan is a short-term loan lasting around two to four weeks, typically for around 25% to 50% of your vehicle’s value.
Like payday loans, title loans have very high fees, so you end up paying considerably more than you borrow. As with payday loans, if you can’t repay a title loan in time, you have the option to roll it over — but you’ll owe even more fees. And if you can’t pay back your loan at all, the lender can seize your car. Once a lender takes your vehicle, they can sell it to get their money back. In some states, the lender may keep the full price of the car, not just the amount needed to cover the loan.
Pawnshop Loan
Similar to a title loan, a pawnshop loan also uses collateral. In the case of a pawnshop, you’ll often supply something of value — jewelry, a rare book or expensive electronics — in exchange for cash. The cash amount is a percentage of the pawnshop’s appraisal of your item — what they think the item is worth. For example, if you pawn a gold necklace that the shop values at $800, the pawnshop may give you $400 or less in cash.
As with any of these quick-cash options, you’ll also need to pay fees on the loan. If you can’t repay the loan on time, usually between 30 to 60 days, you may owe even more fees. If you can’t pay the loan at all, you’ll lose your collateral, and the pawnshop will sell it to recoup its loss.
As with a payday loan and a title loan, you could end up owing significantly more money than you borrowed.
Don’t borrow more than you can pay back
The dangers of borrowing more than you can afford to pay back include not being able to pay on time or missing payments completely, which could lower your credit score. A lower credit score could cause you to be denied loans, a mortgage or even an apartment lease in the future.
If you need to roll over your quick-cash loan, you’ll owe more interest and fees, which may make the loan even harder to pay off. It could be challenging to work your way out of a cycle of debt once you’re stuck. In some cases, you could even lose your collateral.
Don’t borrow money from someone you know without a written agreement
Borrowing money from family and friends may be a good option if you’re struggling to be approved for a loan due to less-than-perfect credit. But you want to be particularly cautious. Borrowing money from someone close to you could get tricky if you can’t afford to pay the money back when they expect it. Agree on a repayment schedule and put everything in writing before proceeding.
Do your research before you accept any quick cash
Carefully think through all options before you accept a loan that promises cash quickly, especially if you don’t know how you’ll repay the money.
Even if you’re in a bind, research all potential options, consider reaching out to people you know and be aware of loan offers that could keep you in debt for a very long time.
Notice: Information provided in this article is for informational purposes only and does not necessarily reflect the views of finehomesandliving.com or its employees. Please be sure to consult your financial advisor about your financial circumstances and options. This site may receive compensation from advertisers for links to third-party websites.
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