You have several options for borrowing money. Each has its own terms, interest rates, and qualification requirements. When you need cash, you may be tempted to go for the option that gets you the money the fastest, but sometimes it can be a costly mistake. Avoid the three most expensive ways to borrow money below and try some of these more affordable alternatives instead.
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The three most expensive ways to borrow money
Payday loans, auto title loans, and credit card cash advances are three of the most expensive ways to borrow money. Here’s why.
1. Payday loans
Payday loans are popular among people with poor credit because they give you money quickly and usually don’t require a credit check. The problem is, interest rates are astronomically high – in some cases over 500%. Plus, the loan terms are only a few weeks long, so you don’t have much time before you have to pay back an amount much more than you originally borrowed.
To put this in perspective, consider a loan of $ 250 with an interest rate of 400% and a repayment term of one month. At the end of that month, you owed $ 333.33. If you didn’t have $ 250 in reserve in the first place, you’re unlikely to be able to afford the original $ 250 plus $ 83.33 in interest a month later. This is why many people end up taking out new loans to cover the old ones and the cycle continues and the interest increases exponentially.
2. Auto title loans
Auto title loans are similar to payday loans in that they have short loan terms and do not require a credit check. Basically, you hand over title to your car to the loan provider in exchange for a certain amount of money, usually up to 25% or 50% of the car’s value. You must have equity in the car in order to make an auto title loan and some companies require that you own the car.
These loans can have interest rates of 300% or more, so you end up in a similar situation to people who have taken out payday loans. If you can’t pay off what you borrow, your lender may offer to transfer your remaining balance into a new auto title loan, or they can legally repossess your vehicle.
3. Cash advances by credit card
Credit card cash advances are when you withdraw money using your credit card. Cash advances often bear interest at a higher APR than regular purchases – and even the APRs for regular purchases can sometimes exceed 30%. Cash advances usually come with a fee, often a percentage of the amount you request. You can find all of this information by reading your cardholder agreement.
While this is a much better deal than payday loans, it can still lead to debt that you carry for months or years. Those who take multiple cash advances or charge a lot on their credit cards might see their debt problems getting worse instead of better over time.
Three best alternatives
If you need the cash, it would be better to save for the item you want to buy, borrow from friends or family, or take out some other type of loan that is more affordable.
1. Save yourself
When time doesn’t count, your best option is to put a small amount of money from each paycheck into a savings account to the item you want to purchase. This way, you don’t have to worry about borrowing money from anyone. If circumstances change – let’s say your old car dies before you’ve saved money for a new one – you may still need to borrow money, but it won’t be that much.
This strategy probably won’t work if you need the cash quickly, and it may require you to make some adjustments to your budget, like cutting back on discretionary spending. But it’s definitely more affordable than borrowing money.
2. Borrow from friends or family
Friends and family can be more flexible than a bank or credit union when it comes to making loans. Some might not even charge you any interest. This is an option worth exploring if a friend or relative has cash on hand, but you both need to understand that there is more to it than cash. don’t repay what you owe, you risk damaging the relationship for good, so you should only do this if you are sure you can repay them.
Before you take any money, you should sit down and discuss how much you will borrow and at what interest rate, how much you will have to pay per month, and what you will do if you are unable to keep up with your payments. Get it all in writing and make sure everyone has a copy so you can refer to it later if needed.
3. Take out a more affordable type of loan
If you are able to take out a mortgage or an auto loan to buy a house or a car, these are much more affordable than payday or auto title loans. The average interest rate for a 30 year fixed rate mortgage is less than 4% and the average rate for a car loan is less than 5%. Your balance will accumulate interest much more slowly, making it easier to pay off.
A Personal loan is a little more expensive than a mortgage or car loan because it does not involve collateral, but interest rates rarely exceed 30% and can be much lower for those with good to excellent credit. Moreover, you can use these loans for almost anything. They’re broken down into regular monthly payments so you don’t have to worry about accumulating interest indefinitely like you would with a credit card cash advance.
Explore all of your options before borrowing money to see what the best deal is. Start with all three alternatives here – and avoid payday loans, auto title loans, and credit card cash advances at all costs.