We help hundreds of Dallas area residents file bankruptcy every year, and while each client’s story is unique, we tend to see common financial mistakes. No one plans to end up buried in debt, but with certain decisions, you’re more likely to end up in financial trouble.
Once your financial picture starts to look dim, it’s easy to accept the fast cash offers that companies offer. You’re late on bills, your mortgage, your car payment – so quick easy money seems like a great solution. Unfortunately, these quick loans end up sending you further down the road of no return.
So, we wanted to share the four types of quick cash loans that you should avoid:
1. Cash Advances
Almost every credit card offers a cash advance – where you can just walk up to an ATM and pull out cash. Yes, it’s immediate money, but you’re actually just adding to your accumulating debt. Even worse, the cash advance usually includes extra cost. You’ll be charged the standard interest rate on your credit card, and you’ll also have an added cash advance fee of 3% to 5% of the amount you withdraw.
Some quick math shows why those fees are bad news: If you withdraw $100, and your card’s APR is 24%, and your minimum cash advance fee is $10… you’d also have a $2.02 finance charge for the first month. That means the annualized cost of the loan is 144%.
Making matters even worse, most credit cards apply your monthly payments towards the parts of your balance with the lowest interest rate. Typically, that means your payments cover purchases, so the interest on the cash advance continues to grow.
2. Overdraft Loans
Almost every bank offers overdraft protection, which means you can continue to write checks or charge purchases, even if you’ve got nothing in the bank. Each overdraft transaction is charged a small overdraft fee, somewhere in the range of $30.
Here’s why that’s bad – the overdraft fee is automatic, so if you’re not on top of your current balance, you’ll get hit with several overdraft fees… one for every time you use your card.
When you’re behind on bills, sometimes a few overdraft fees can seem like an easy price to pay to skate by until the next paycheck. Unfortunately, banks are allowed to clear checks and charges in a different order than when they occurred. If you write a $1000 mortgage check and have $1000 in the bank, and then the next day you make several small purchases, you’d think that the charges would go through first. If that were the case, you’d only get hit with a single overdraft fee. Many times, banks push the large checks through first, which would result in multiple overdraft fees instead… and multiple fees can add up quickly.
3. Payday Loans
Payday loans are bad news – but they’re very attractive when you’re desperate. It seems like a great idea to grab a few hundred bucks to tide you over until payday, and the fee is usually around $15 for every $100 borrowed, with no interest. As collateral, you write a check for the full amount, which will be cashed two weeks later when the loan is due to be repaid.
Think about it for a second – if you’re so short on cash and already behind on bills, it’s not likely that you’ll be able to repay the loan once you get your next paycheck… and you’re not going to want to have the collateral check processed. Your only option is to renew the loan.
Most of the time, the borrower can’t repay the loan when the two weeks have passed, so they renew the loan. You pay another $15 fee per hundred that you owe, and you have another two weeks to pay it back. On average, borrowers pay back $793 on a $325 loan (after renewing multiple times and taking four months to repay).
4. Car Title Loans
Similar to payday loans, car title loans are short term loans, but you offer your car as collateral on the loan. Since car title loans are based on the value of your car, they allow you to borrow larger amounts of money – as much as several thousand dollars. You’ll usually have one month to repay the loan.
Again, if you’re already in dire straits, it’s not likely that you’ll be able to repay the loan. Most borrowers end up renewing their loans, because if you don’t repay the loan or renew it, you’ll lose your car. It’s estimated that borrowers end up paying an effective interest rate of around 300% on car title loans.
If you’ve fallen victim to one of these fast cash loans and your debt is spiraling out of control, we can help. Call us at 214-760-7777 for a free debt consultation and we’ll take a detailed look at your financial situation. We’ll explain your options and help get you on the road to the fresh start that you deserve.