BBBTips™ on the ABCs of Short-Term Loans

10/16/2007

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When You’re in a Financial Pinch

When you need money quick, it is tempting to look for a quick solution. Who wants to spend time researching loan options when the fridge just died? You need $500 and you need it fast.

If you lack a savings account, you do indeed need to take action. Just make sure it is the right action. Opting for the “easy way out” could leave you with “no way out” in a matter of weeks.

What Are Your Choices?

First, call your creditors. Before you borrow new money, contact your credit card and mortgage lenders. They may offer some leniency on your current debts, which would free up a bit of cash. Some have hardship programs that permit skipping a payment or making a smaller minimum payment. Maybe your creditor would be willing to reduce your interest rate.

Second, beware of “quick and easy” solutions. Advertisements for “quick and easy” loans can tempt any consumer. Don’t be lured into making an expensive mistake.

Payday Loans: Often referred to as “quick cash” or “check cash” loans, payday loans are easy to obtain because no credit check is required. Unfortunately, they carry steep annual interest rates (sometimes more than 500%).

Consumers find their debt snowballs if they cannot pay back the loan by their next payday. Some choose to extend the original loan, along with the added finance charges. Some visit another payday lender to take out a second loan, and a third loan, and so on. The Center for Responsible Lending found that the typical payday borrower eventually pays back $793 for an initial $325 loan.

Eleven states have banned payday loans. Congress passed a law capping the interest rate (36% APR) that payday lenders can charge military families. Payday lenders claim their loans are less expensive than incurring repeated bounced check fees, late payment fees, or having your utilities cut off. You do the math – is it worth paying an annual triple digit interest rate?

Car Title Loans: You offer your car as security when you apply for a car title loan. You must provide your car title and a set of car keys to the lender, who holds them until the loan is repaid. Like payday loans, car title loans carry a steep annual interest rate and can trap you in a cycle of debt. You will probably be required to make one large payment, after a short period of time (a month or so). If you cannot make that balloon payment, you risk losing a very important family asset – your car.

Pawnshops: Pawnshops are called the “poor man’s banker” although more are appearing in middle-class neighborhoods. Pawnbrokers take a consumer’s possession (a piece of jewelry, for instance), as collateral for a loan that usually carries an interest rate exceeding 20%. If you do not repay the loan with interest by a certain date, the pawnbroker can sell your possession. The reputation and regulation of pawnshops vary from city to city.

Third, borrow from a lender you can trust.

A Family Member or Friend: A family member or close friend may be willing to loan you money for an emergency. Just remember to treat the loan and the relationship with respect. Draw up and sign an agreement, outlining how and when you will make repayments. Then, live up to your part of the bargain.

Credit Card Companies: If your credit cards are maxed out, or you routinely take cash advances from one card to make payments on another, this option is not for you!

If you are a responsible credit-card user, options for a short-term loan include:

  • Introductory, low-interest credit card: These are not as easy to come by as they used to be. If you do qualify, scrutinize the credit terms. How long does the introductory rate period last? Is the interest rate fixed or adjustable? What is the annual fee, late fees, over-the-credit-limit fees and other charges you may incur?
  • Balance transfer option: Transferring your balance from a high-interest card to a low-interest card might make sense. Carefully consider the terms of the offer, however. Is there a transfer fee? How long is the lower interest rate in effect? If you do decide to use this option, recognize that tiered pricing typically goes into affect. Your transferred balance enjoys a low interest rate, but your payments are applied first to any “new purchases,” which carry a higher interest rate. Put the new card away and pay down your transferred debt as quickly as possible before you start charging again. 
  • Cash Advance: When you take a cash advance, you will typically pay a higher interest rate than you do for purchases. Use cash advances only in emergencies and pay down your balance as soon as possible.

Your Employer: If you have no other option, as a last resort you may want to check with your employer about a cash advance. Some employers offer emergency cash advances to employees in need. They will then deduct loan repayments from future paychecks. If your employer accommodates your request, consider it a one-time emergency offer and don’t make repeated requests for more advances.


Follow the ABCs of Consumer Lending

Now that you know your options, review the ABCs of short-term loans. Consider these factors whenever you choose to borrow money.

A is for Annual Percentage Rate. Do not select a loan based solely on the interest rate. Your minimum monthly payment should not be the deciding factor either. Look at the Annual Percentage Rate (APR), which is the total cost of the loan (the effective annual interest rate plus interest charges and one-time fees).

B is for Behavior. You know yourself best. Be honest and consider your spending and money management behavior. How likely are you to pay back the loan according to the terms of the agreement? Will you be tempted to roll over that payday loan? Do you regularly incur late fee charges, miss payments or make partial payments on your credit cards? Stop kidding yourself and change your bad habits.

Commit to building a savings fund. A couple of dollars a day can add up to a hundred dollars before two months have passed. If possible, arrange for a portion of your paycheck to go directly into savings. If you have a rainy-day fund, you can borrow from yourself the next time you have a cash emergency.

C is for Comparison Shopping. Do not take the first loan offer that comes your way. Compare the reputation of the lender, the Annual Percentage Rates, and the total dollar costs, including service charges and other loan provisions that could increase fees. Also, do not hesitate to negotiate for a better deal.

D is for Deceptive Offers. Ignore “too good to be true” loan offers. Be very leery of ads that “guarantee” loans to people with poor credit histories. These offers typically require you to pay a fee in advance. You will likely never see that money again; nor will you receive the promised loan. Check out offers from unknown or out-of-state financial institutions with the Better Business Bureau (www.bbb.org) or other trustworthy source. This is particularly important for loan offers you find on the Internet, or that pop up in your e-mail box, uninvited.

If Things Do Not Improve, E is for Expert

If borrowing money short-term starts to resemble a long-term nightmare, contact a reputable credit-counseling agency. A trained counselor can help break your cycle of debt. They will evaluate your situation and work with you to develop a plan for financial stability. They can also determine whether a debt consolidation plan makes sense in your case. The Better Business Bureau offers tips online for finding a reputable credit counselor. Visit our Resource Center to search all BBBTips™.

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About ClearPoint Financial Solutions, Inc.
ClearPoint Financial Solutions, Inc.™ (formerly Consumer Credit Counseling Services of America, Inc.) is a national non-profit organization dedicated to helping consumers achieve financial wellness through counseling and education. Established in 1980, ClearPoint has helped over one million individuals achieve financial security. ClearPoint is a System-wide member of the Better Business Bureau (BBB), and one of the largest members of the National Foundation for Credit Counseling (NFCC). Headquartered in Richmond, Virginia, ClearPoint manages branches across the country. Personalized and confidential consultations are available in person, by phone or online. Visit ClearPoint Financial Solutions at www.ClearPointFinancialSolutions.org or call 877.498.2777. Credit Counselors, CDC Consumer Debt Counseling, and Solutions, Inc. are all trade names of ClearPoint.

About BBBTips™
BBBTips™ is a trademark of the Council of Better Business Bureaus, Inc. (CBBB) used for information provided to assist consumers and businesses in making informed and intelligent decisions. BBBTips™ are developed in partnership with the Better Business Bureau Consumer Education Foundation, Inc. and made possible, in part, through the generous financial and technical support provided by corporate sponsors that are members of the CBBB and of the Better Business Bureau where the sponsor is headquartered. As a matter of policy, the CBBB and Better Business Bureaus do not endorse any product, service, or company.

09/24/07

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