Let’s get one thing straight; no matter how you slice it, when you’re short on money, looking for a quick cash advance is the Hail Mary pass of personal finance. As such it should always be the option of last resort.
In an ideal world, during a financial emergency, everyone would simply tap their rainy day savings account that they have set aside for unexpected expenses. Of course, the reality is there will always be people out there who find themselves between that financial rock and a hard place where they absolutely positively need some fast cash but are completely tapped out.
So what to do?
To be sure, there are no easy answers when you’re flat broke and faced with a financial crisis needing immediate attention. In fact, when it comes right down to it, none of the alternatives are very savory. To prove it, here’s my own little cash advance comparison that highlights the pros and cons of some potential options.
Payday Loans
Pros: Payday loans (also known as cash advance loans) are quick and they can usually be handed out the same business day. They are also convenient; you can typically get them online. Best of all they do not usually require good credit or any type of collateral. Oh, and quick repayment will help improve your credit score.
Cons: The convenience and speed of these payday loans come at a high cost. Fees can reach up to $40 or more for every $100 that you borrow, which is extremely expensive compared to traditional loans. It’s not uncommon for lenders to advertised 14-day loans for $100 that came with a fee of $17.65 — that’s an annual percentage rate of 460%! These loans have to be paid back quickly too, usually within a couple of weeks. Miss that deadline and things then get even more expensive. With that in mind, it’s probably a good thing that most payday loans are typically limited $1500 or less.
Title Loans
Pros: Like payday loans, title loans do not usually require good credit. Title loans often come with higher limits than traditional cash advance or payday loans. As with payday loans, quick repayment of title loans will also help improve your credit score.
Cons: These loans are typically just as expensive as payday loans. The reason title loans have higher loan limits than payday loans is because they are usually secured with the title to your automobile — so if you don’t repay the loan you’ll lose your car.
The Bank of Dad
Pros: These types of loans come with no fees and usually have low interest charges, if any at all.
Cons: Borrowing from a friend or family member won’t improve your credit score if you pay them back. Even worse, if you don’t pay them back, you risk straining or severing the relationship.
Loan Sharks
Pros: Usually willing to loan as much as you need. (Er, so I’m told.)
Cons: High interest rates make the APRs of legitimate payday and title loan companies look downright inexpensive. Loans are typically secured with personal body parts; legs and arms are especially popular. Friendliness and compassion are not strong suits of their customer service department.
Bank Robbery
Pros: I think they’re pretty obvious, don’t you?
Cons: Not only is robbery illegal, but it’s also extremely dangerous. In fact, it’s a stupid idea altogether. Get caught and it can cost you up to 25 years in the state penitentiary. On second thought, forget I even brought this one up.
The Moral of the Story
Remember, folks: Payday loans, cash advances, and title loans are not meant to be used for long-term financing, and they should always be fully paid back as quickly as possible because of their expensive fees and high interest rates. Those who don’t will find themselves in an even deeper hole to dig out from — so think carefully before deciding to get one.
As you can see, none of the options I’ve presented are very attractive, which is precisely why it’s extremely important to establish — and faithfully maintain — emergency and rainy day funds. Do that and you’ll never have to worry about making such a tough decision in the first place.
Photo Credit: Jesse Wagstaff
One thing I didn’t see here that’s worth mentioning is tax return anticipation loans. I was just reading an article that they’re limited to just $1,500 this year, so many decide that they’re just not worth it and just wait for the actual return. On top of it, the biggest ‘seller’ of these (H&R Block) was not even allowed to do them at all this year because of how awful they were in the past. I know this is a once-per-year situation, but the changes for 2011 are definitely a step in the right direction if you ask me!
I found the Loan Sharks and Bank Robbery cons very funny! You’re right, none of these options seem good to me either. What is your opinion about credit cards as some kind of “cash in advance” in case of emergency?
I hit up the Bank of Dad in college when I got accepted into a program to study Greek literature. I hadn’t planned on applying or getting into it and since I was committed to going at that point it was Dad or a student loan. Luckily, Bank of Dad has no interest rates.
Very nice coverage of an icky subject. Planning sure beats the options. The bank robbery one was a clever twist. Don’t hear too much of that one in the personal finance lit! (this one’s in my round up on Thurs) 🙂
Of course, robbing a bank is a little bit like robbing a post office facility by force. Both crimes can be considered a Class B Federal Felony if you do it – hence the very severe prison sentence of up to 25 years if you are caught! Just don’t even think about doing this at all! Not worth the trip to federal jail!
Len,
I do not beleive that payday loans report in positive payments, only negative, if there is a default. Using payday loans will not raise your credit score in the three major reporting bureaus, but each company may raise the amount you are able to borrow on subsequent loans. It is a very expensive way to get money.
Wow, that doesn’t seem right though that it wouldn’t result in a positive report assuming the loan is paid off in time. Thanks for the heads up. I want to do a bit more research to verify that…
I believe no creditor is required to report any information to the bureaus, positive or negative if they choose not to. It’s really completely up to them.
You’re right, Andrew. From what I could find out, that is indeed the case. It’s entirely up to the creditor.
@Beagle: My biggest beef with anyone who gets those loans is that they result in a double loss: Not only is it a high interest loan secured by their refunds, but they also are borrowing against money that they could have had in their pocket and earned interest on all year long by simply increasing their withholding exemptions at the beginning of the year. Ouch!
@DoNotWait: My opinion on credit card cash advances is that they are no different than payday loans or title loans.
@Jenna: I know my kids depend on the Bank of Dad to bail them out sometimes — but I charge interest after a set grace period.
@Barb: Thanks Barb. If you need quick cash, the bank robber option is always there. Usually all you need is a note and nerves of steel. BLATANTLY OBVIOUS DISCLAIMER: That being said, it’s still a STUPID move, people!
It’s a really stupid idea to rob a bank. Putting a note in front of a teller’s face can yield you anywhere from $200 to $2000, and that’s it. I can tell you that from my days as a teller, I never kept more than $1000 at my station. That’s not a lot of wampum, especially when you consider the legal ramifications getting caught can bring.
Thanks for sharing that info, JoJo. Were you ever robbed as a teller? I ask only because in my life I’ve been a victim of two armed robberies myself — which I wrote about here:
http://lenpenzo.com/blog/id1135-how-i-survived-two-armed-robberies.html
Set up a HELOC? That seems to be popular with bloggers these days. All those loan options above are pretty bad. Although I heard loan sharks are actually cheaper than payday loans.
Yeah, but the collateral requirements are a bit steep.
Len,
As for Payday loans, they usually do not report in payments to credit bureaus – just defaults. They will not help build credit in any way, except to make the recipient more eligable to take higher payday loans within the same payday loan service, repeating the problem of high interest rates.
@Len, don’t you think that some credit cards have a lot lower interest rates than payday loans or title loans?
Yeah, that’s true. Perhaps I should have tempered my comment regarding credit card cash advances as being no different than payday loans, huh? 🙂
(I didn’t include them in my list because I assumed people would tap their credit cards to their limit before considering a payday loan.)
I had a relative and some coworkers get burned by payday loans. They’re a quick fix, but they’re usually much more trouble than they are worth. Love the list- having the pros and cons is helpful. Maybe some people will look at other alternatives.
Regarding the bank of mom and dad.
I have a friend who calls around to friends and family and offers her services when she’s running low on cash, so it’s not a loan but a job. And Len, I know how dirty your mind can be..by services, I mean babysitting, painting or housecleaning.
She’s a psych major, so she’s really good at offering you something you want/need, so it’s a win/win. She knows I’ll jump at any offer of babysitting, so instead of feeling awkward about the solicitation, I am overjoyed at the prospect of having a night out.
Many, many years ago I got caught up in the payday loan cycle and paying them back on time doesn’t get reported to the credit bureaus. So essentially, a payday loan does nothing to improve your credit, but if you don’t pay it back it can wreck it.
A remedy to not having to hit up these truly bad options is creating a budget.
P.S. I like the comment about paying loan sharks with body parts. LOL!
You also didn’t mention the plain old credit card cash advance. Take your high-interest credit card (because, lets face it, if you are getting a cash advance off a card you probably didn’t get the best rate), put it in an ATM, and take the cash! It will only cost you 30%+ APR in the end!
@Elle: Thanks, Elle.
@FirstGen: Whaddya mean, Sandy, you know how dirty my mind can be? 🙂 I’m hurt. No, actually, not really. Thanks for clarifying that. 😉 I think offering services for cash is an absolutely terrific way to try and raise money from family.
@LittleHouse: I think that is a shame that on-time payment of payday loans can’t help your credit score. I wonder why that is.
@Jennifer: I can only assume the bad economy is the reason you’re seeing more of them. And Sandy’s idea *is* excellent! 🙂
@Robert: I purposely avoided them for complicated reasons, but you’re right. The problem is the interest is charged from the moment they are taken — so there is no grace period (although most folks seem to be amazed when they find out there isn’t one.)
Len, maybe the bank robbery idea isn’t too bad after all. Just look at the benfits you will get while incarcerated: Free housing, Free food & drinks, Free medical, Free dental, Free vision, Free exercise areas, etc.
That folks is alot of Free stuff! And money saved!
But, I WILL NOT go to jail for bank robbery.
And I’m not recommending anybody else choose that route to financial independence either.
Jail is a pretty good deal nowadays, huh? Well, unless you are in Sheriff Joe Arpaio’s jurisdiction in Arizona. That man knows how to run a prison system like a prison, as opposed to Club Med!
Uhh Len, I guess I forgot to put in my post: [[sarcasm]] for the being in jail is a good deal.
That definitly does NOT appeal to me.
And I *still* don’t recommend it to anybody else either.
Hi Len, those payday/title loans are very popular around here, judging from how many of these businesses I see. I wonder if they are increasing due to the ongoing financial problems in the economy + the fact that banks have tightened their lending standards a lot.
That said, nothing’s better than an emergency fund, although Sandy’s idea of offering needed services to friends and family is a good one. There are a few things I can think of that I would be willing to pay for.
Whomever gets these kinds of loans obviously are in desperate situations. There usually is a family member or friend you can borrow from, sometimes with no interest. You must prove yourself, in general, that you are trustworthy. However, stories abound that in hour of need, family and friends look the other way. That’s sad but happens once in a while.
Signature lines of credit still exist.
You can’t be a deadbeat, but rates are way better than any credit card.
I work at a bank also and i would say its really not worth it. You would probably get 5k Max. Aslo it is a federal crime.