Easy Money May Not Be so Easy

These days it is hard to avoid the “get cash quick” advertising commercials. It seems so easy, especially if you need money fast. You know the adage: if it looks too good to be true, it probably is. As you will see below, easy money options can be very expensive. Look for another way to solve your money problems while you keep away from these five get cash quick/easy money options:

1. Debt Consolidation Loans:
Banks and finance companies offer loans to consolidate all your debts and pay them off with a new loan. Sounds good, but carefully check the fine print. The amount of interest you can be charged on the new loan can vary from 10% to more than 40% depending on your credit rating and the security you post as collateral. If the debt consolidation loan is “secured”, that means you will be required to post collateral to secure repayment of the loan. In most cases, that collateral will be your home or vehicle. If you default on the consolidation loan and have secured it with your home, car or other property, the finance company can foreclose on your home, take your car or other property. Make sure this type of loan is worth having.

2. Pawnshop Loans:
At pawnshops, you leave your property, like jewelry, electronic and photo equipment, musical instruments and firearms with the shop in return for a loan of 25-60% of the item’s resale value. The average amount of a pawnshop loan is $75-$100. You are given a few months to repay the loan at high interest rates that can vary from 12% to 240% or more depending on whether state law restricts the interest rate charged by pawnshops. If you default on the loan, the pawnbroker is the new owner of the property.

3. Refund Anticipation Loans (“RALs”):
Tax preparation companies offer RAL loans for the short time frame between the date when the taxpayer receives the refund and the date when the IRS repays it by depositing the refund into the lender’s account. This is usually only a one or a two week span of time. The amount of the loan is the amount of your anticipated refund minus the loan fees and the tax preparation fee. The interest rates on these loans can be expensive: annual rates of 70% are not uncommon. There also are other risks with these loans. If your refund is less than expected, you will still be responsible for paying the full amount of the loan. If you default, the lender can assign the debt to a collection agency and hurt your credit rating. All because you didn’t want to wait one or two weeks.

4. Payday Loans:
Payday loans are a fast growing phenomenon with payday loan companies becoming a replacement for banks. With a payday loan, you give the lender a check and get back an amount of money less than the face value of the check. Or, you can sign an agreement giving the lender the right to withdraw money either from your bank account or from a prepaid credit card to which money, like wages, is regularly added. For example, you give the lender a check for $300 and the lender pays you $250 in cash and keeps the remainder as his fee. The lender holds the check for a few weeks (until your payday). At payday, you must pay the lender the face value of the check ($300) usually by allowing it to cash the check. If you cannot make the check good, the lender requires you to pay another fee ($50). At this point you owe the lender $350 (the $250 you borrowed plus the first $50 fee plus a new fee of $50). If you need another loan that week, the lender charges another fee and so on. The annual interest rate on payday loans can range from 200 to 500% and more.

5. Car Title Loans:
When you get a car title loan, a bank agrees to make a secured loan against the value of your car. You keep and drive the car, but the lender keeps the title as security for repayment of the loan, as well as a copy of your car keys. Missing even one payment can mean losing your car. Lenders may also ask you to use your home, as well as your car, as collateral. Missing a payment with your home as collateral means you risk losing the home. Interest rates are steep with these loans because your car is considered a used car with a restricted resale value and monthly finance charges of 25% (300% annual interest rate) are not uncommon. Since these loans are often targeted to members of the military, Federal law prohibits lenders from charging more than 36% interest to military personnel. There are no restrictions on interest that can be charged to non-military personnel unless state law regulates interest rates.

The term “usury” is defined in Webster’s as “the lending or practice of lending money at an exorbitant interest.” All States, including Maryland, have laws prohibiting usury. Interest rates in Maryland range between 6 and the usury limit of 33%, but lenders have found ways to ignore State usury laws. How?

One answer is that national banks are allowed to charge their customers, no matter where they are located, interest at the rate allowed by the state in which the bank is located. North Dakota has repealed its usury laws which is why banks like Citibank and others have their principal offices in North Dakota. North Dakota’s lack of an interest rate cap has become the standard national interest rate on credit cards.

Another reason State usury laws are ignored is that many consumers now use loans provided through the internet by out-of-state lenders. Be aware that loans provided through Indian tribes are not subject to Federal or State usury laws.

The bottom line to all of these get cash quick/easy money schemes is that they are just that. You are going to pay dearly for getting that cash. Why put yourself in that position? Setting aside even a small amount of money from every paycheck in an emergency fund is a much better and less expensive way to handle your needs for cash.