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6 Really Dumb Ways to Borrow Money, Plus Three Better Alternatives

February 14, 2016 texas

High-interest lenders, loan sharks, and pawn shops do not have your best financial interest in mind. While they may seem like the only option at times, these, along with other dumb ways to borrow money, are simply a waste of money. Here are some of the worst things to do with your money, along with a few alternatives to help you out.

Dumb Ways to Borrow Money

[Read: 7 Money Traps to Avoid at the Store]

1. Payday Loans

– Cash advances on paycheck

– One of highest interest rates for borrowing

Of all the dumb ways to borrow money, payday loans are among the dumbest. Typically with these loans you borrow a small amount – under $500 – and are required to repay when you get your next paycheck. The downside? Many of them have a finance charge of $10-$30 on every $100 you borrow, which would equal an APR of almost 400 percent. Compare this to credit card rates, which are about 12 – 30 percent.

2. Car Title Loans

– Title of vehicle used as collateral

– Short-term, high-interest loans

When you take out a title loan, you are required to give the lender the title of your vehicle as collateral. Typically, you have thirty days to pay back the loan, and if not, the lender is allowed to take your vehicle. However, this is not the only danger. Most of these loans also carry a charge of 25%, which is why they’re on our list of dumb ways to borrow money.

3. “Buy Here, Pay Here” Dealerships

– Bad way to buy a car

Do you want a car but have bad credit? These kinds of ads may look enticing, but they are really just a dumb way to borrow money. These dealerships offer high-interest loans to buyers who typically would not qualify for a regular car loan. Borrowers are then often forced to come to the dealership once or twice a month to pay installments on their loan in cash. Even worse, dealerships can equip cars with a device where they can remotely shut down the car if a borrower is behind on their payments

4. Cash Advances from Credit Cards

– Turns credit card to instant cash, with a cost

This dumb way to borrow money lets you turn your line of credit into cash, either with a check from the credit card company, or through an ATM withdrawal. However, this will cost you. Typically there is an initial charge of 3-5 percent upfront, in addition to a 25 percent interest rate from many major companies. Also, this interest will begin to accumulate immediately, unlike most credit card purchases. Check out this article which discusses a few methods to avoid a cash advance.

5. Bank Loans on Direct Deposit

– Payday loan in disguise

If you have direct deposit set up with your bank, they may offer to give you a direct deposit loan. However, this is just a sneaky name for a payday loan, which we already know is a dumb way to borrow money. These are short-term, low-amount, but high-interest loans, which will be paid back with the money from your direct deposit. The main catch to these types of loans, is that the APR can be over 300 percent.

6. Pawn Shops

– Use valuable as collateral on high-interest loans

Most people have seen, or at least heard of, the number of different TV shows which feature pawn shops. Just because they are currently popular, however, does not mean they are a good idea. With a pawn shop, you bring in a certain item (what is accepted depends on the store), and the shop determines its value. Then, they offer you a loan based on the value. If you do not pay back the loan, the shop will keep your item and sell it to recover the cost of the loan. So what makes this such a dumb way to borrow money? The interest rates on these loans can be over 25 percent, depending on state laws. Additionally, there are often hidden fees which drive up the cost.

[Read: 7 Money Traps to Avoid at the Store]

Better options

  • Check credit score
  • Check the interest rates
  • Use credit counseling

Now that you know all of the dumb ways to borrow money, what are some alternatives? First, you should check your credit score, which lets you know what kind of rates you deserve. Often, lenders offer higher rates to people who actually qualify for lower ones. If your credit is truly bad, try looking into credit counseling. These are professional services which can help you get your credit back on track without these harmful loans. Finally, before taking out any kind of loan, read the fine print. Make sure you know what kind of fees and APR you are getting into. For a little comic relief, check out this comedian’s take on payday loans:

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