pwfm Men & Money

Avoid These Financial Services

Looking for some extra cash? Anyone who hears this pricks up their ears, no matter how savvy -- and many of the services that promise extra cash are perfect illustrations of the old chestnut: “There’s no such thing as a free lunch.” Believing in the promise of free cash will often put you deeper into financial misery than you already are. Jobs are being lost, salaries are frozen and the housing and stock markets are running lower than they have in years. Considering this array of negative news, it can be awfully tempting to look for quick cash to solve your immediate financial needs. If you’ve been tempted lately, check out a list of financial services to avoid to get your wits back about you.

Pay day loans

Pay day loans seem like a fantastic idea. They’re non-invasive, and within minutes you can walk out with anywhere from $50 to $2,000 based on your recent pay stub. After all, it does not sound that bad: You can borrow $100 today and pay it back with $115 next week when your paycheck comes in. It only costs $15, right? Well, technically yes, if you only do it once. In reality, most people that go down this path just keep rolling the amount over again and again. Everything’s great until one day the lender just changes its mind about advancing you the money. You are left with an empty wallet and perhaps hundreds or even thousands in interest charges and administrative fees. Pay day or cash advance loan companies charge interest equivalent to 300%-400% per year. The companies that provide this service even disclose this amount on their web sites and applications. So, if you thought your credit card rates were high, think again. If this is truly your only option, you really would be better off borrowing from family or even asking your employer for an advance on your next salary -- even if both approaches are somewhat humiliating.

Credit card cash advances

Credit card cash advances work much like your debit card: You swipe your card at an ATM, enter your PIN and you can withdraw cash up to your cash advance limit as established by your credit card issuer. It sounds awfully easy, but it’s one of the worst ways to obtain cash. Almost certainly, the ATM will charge a fee for this transaction -- and that is just the start. With a cash advance, the interest starts accruing immediately; there is no grace period. You may also find that cash advance interest rates will be significantly higher than your standard rate -- perhaps up to 29% APR or higher. Once you tap this line, the interest charges will be flowing and you may find yourself in a dangerous spiral where your payments get applied to this cash advance amount last. Additional fees for accessing the cash, such as a flat service charge or percentage of your cash advance amount may also add to your woes. Frivolously taking out cash advances on your credit card can quickly find you on the business end of a mountain of unforeseen fees and headaches.

Credit card convenience checks

We’ve all seen credit card convenience checks. Most often, you get them in the mail along with your monthly statement or perhaps independently promoting a special offer. They are positioned as a balance transfer offer, but they are checks that you can technically deposit anywhere. Convenience checks frequently come with attractive low interest rate offers that may actually make some sense to you. However, before drawing down your credit line by using these checks, carefully read the terms and conditions. There is almost always a fee -- usually 3% -- associated with this “convenience.”

High interest home equity loans

Historically, tapping into your home as a source of cash has been a great funding source, but let’s be honest: Over-leveraged home values were what got the United States into the mess we’re in today. With home prices falling, you may find that you have less equity than you thought. To compound problems, banks are tightening the amount they are willing to lend you and will likely vouch for a lower appraisal amount to shorten the pot. Home equity loans or lines of credit often come with high upfront fees. These are often rolled back into the entire loan balance, which means you could be paying interest on these fees for the duration of the loan and further reducing your equity and your ability to pay down the principal balance. If you are investing the money back into your home for improvements, it’s not a terrible idea to go this route, but if you are counting on this to pay bills, you should avoid this approach entirely. The biggest downside is that the bank can call this loan at any time and if you fall behind, you could end up among the throngs of people in foreclosure.

Title loans

This is not the most common form of loan, but when things are looking bleak, this monster seems to always find those in need. If you own your car, you can take out a title loan -- basically using the car as collateral. In most cases, the person taking out the title loan ends up losing his or her car to the creditor. The amount you are given is far less than what the car is worth and you can be assured that the interest rates will be high and the extraneous fees will be many. Even worse, if you lose your car, the creditor will get to sell it for the full appraised value and you do not get a cent of that profit. Moreover, whatever profit is made can’t be used to pay down what you owe. The creditor also retains the option to take you to court and hit you for the balance past due plus any fees associated with your late payments and court costs. In short: It’s a wash.

Pawn shops

Most people do not look as a pawn shop as a loan transaction, but that’s exactly what it is. If you need cash, the pawn shop owner will take what you have (jewelry, valuables, etc.) and give you a ticket and some cash. The cash provided is far less than what the item is worth and yes, interest is being charged on this amount given to you, and the rates are rarely friendly. If you default or show up even a day late, the pawn shop will then sell your item for what it wishes, usually retail price or close to it. If you want it back, you have to pay the full retail price. If you just need some cash and are totally OK with never seeing the item again, you’d be smarter having a garage sale or posting items on eBay.

don't dig your own hole

Tightening credit standards and bad credit scores are making it harder for everyone to acquire loans and cash. When things look bad, it can be very tempting to take someone one up on their offer to loan you money on their terms. Before going into even the smallest amount of debt, evaluate your finances, analyze the terms and conditions of any financial transaction and make a good decision -- even if it means being stone cold broke for the coming weeks. If you think things are bad now, making a shortsighted decision can potentially make matters way worse.