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Book I: Taking Charge of Your Finances
Avoid these loans
If you don't have enough money to pay all
your living expenses and debts, do not raise
the money you need by getting one of the fol-
lowing types of loans. Although they may give
you some temporary financial relief, in the end,
they'll make things worse -- maybe a lot worse.
When it comes to improving your finances, easy
answers and shortcuts just don't exist. You've
just got to bear down and do it.
Advance fee loan: Just as its name implies,
to get this kind of loan, you must pay money
up front to the lender -- sometimes as
much as several hundred dollars. Some
advance fee lenders will take your money
and run, but others will give you a very
high-interest loan. Traditional lenders do
not make advance fee loans.
Finance company loan: Finance companies
make relatively small high-interest loans.
Some finance company loans are downright
dangerous: The lender may be less than
honest about all the fees associated with its
loan, or it may mislead you into thinking that
you're getting an unsecured loan when the
loan actually is secured by one or more of
your household goods, such as your furni-
ture, entertainment center, and so on. (This
detail is usually buried in the fine print of the
loan agreement.) If you default on the loan,
you risk losing the asset(s). Some finance
companies encourage consumers to get a
bigger loan than the consumers can afford
so they'll end up in default.
Payday loan: This is a very short-term
high-interest loan made by check-cashing
companies, some finance companies,
and businesses that do nothing but make
payday loans. To get this loan, you write a
personal check to the lender for the amount
of money you want to borrow plus the
amount of the lender's fee -- usually a per-
centage of the loan amount or a set amount
for every $50 or $100 you borrow -- and
you agree to repay the loan on your next
payday. The lender pays you the amount of
the check minus its fee but does not cash
your check.
On your next payday when you repay the
loan, you get the check back. If you can't
repay the loan on the next payday, the
lender rolls over the loan until the follow-
ing payday in exchange for your paying the
lender another fee, which will probably be
higher than the first fee. Over time, if you
keep rolling over the loan and paying higher
fees, the cost of the loan skyrockets and
you have a harder time paying it off.
Some states have payday loan laws.
Contact a consumer law attorney or your
state attorney general's office to find out if
your state has such a law and what your
rights are.
Pawnshop loan: This is a short-term loan
(no more than three months, in most states)
with a very high interest rate. With this kind
of loan, you give the pawnshop an item that
you own, such as a TV, DVD player, piece of
jewelry, or computer. The pawnshop lends
you a percentage of the item's value. At the
end of the loan period, if you cannot afford
to pay the loan plus interest, the pawnshop
keeps your item and sells it.
Tax refund loan: Also known as a tax antici-
pation loan or an instant refund loan, this
kind of loan involves borrowing against your
