It’s easy to fall into the open arms of payday lenders when you’re broke and have bad credit. Obviously, you don’t like the idea of paying a 400% interest rate on a few hundred bucks. You’re not stupid. You know it’s an expensive source of credit, but you’re in a tight spot and you need the money.
Here are five sources of credit that can be worse than payday loans.
Payday loans are an extremely expensive source of credit, which you should only use as a last resort. But it’s not the only or even the most expensive source of credit in town.
Car Title Loans
A car title loan is a secured loan that uses the value of your car as collateral. You get to drive the vehicle, but the lender has the title as security, just in case you fail to make your loan payments. So you could lose your car, even if you miss just one payment. Worse yet. Car title loans have high-interest rates and fees that are comparable to payday loans. A typical car title loan will charge 25% per month to finance the loan, which amounts to an APR of at least 300%.
Pawn shops will give you a short-term loan with interest rates of up to 300% APR, yet still, require you to pledge a valuable item as collateral. The short term of the loan often makes it difficult for the borrower to get the money together in time, which means the pawn shop can keep your valuables and sell them for a tidy profit.
Credit Card Cash Advances
A credit card cash advance works like a debit card. You go to an ATM, key in your pin number and get the cash. Although credit cards don’t charge as high rates as payday and car title loan lenders, they certainly aren’t cheap. Many credit cards will charge over 30% APR. One credit card issued by First Premier Bank charged a shocking 79.9% APR.
In addition to interest rates, credit card cash advances charge outrageous fees, which make them more expensive than payday loans when you borrow small amounts, such as $50 or $100. Hard to believe? Consider the cost of a $100 cash advance. The average cash advance fee is around $15, and that doesn’t include the ATM charge (up to $5) and interest. That is more than you would pay for a $100 payday loan ($15). However, it’s not just the fees that make cash advances dangerous. Because credit cards allow you to borrow as much as you want up to your credit limit and only require you to pay the monthly minimum, you can quickly get dragged into a spiral of debt that can take years to repay.
Late Payments And Bounced Checks
Slow and steady does not win the race when it comes to credit card payments. Although credit cards provide a convenient and relatively cheap source of credit, their late payment and returned payment fees are no joke. Credit cards will often charge $37 for late payments and an additional $37 fee for returned payments, regardless of the amount owed. You could owe just $5 on your credit card bill and pay $74 in fees for bouncing a check and paying your credit card balance late. Looking for a credit card with low or no late payment fees? SuperMoney’s credit card search engine allows you to filter credit cards according to the features that matter the most to you.
Although you probably don’t view it as a loan, utility companies offer their services on credit. As long as you pay on time, it’s all good. No interest payments or fees. Miss a payment, though, and utility bills quickly become one of the most expensive sources of credit. First, there is a late payment fee of $30 to $50. If you delay your payment further, the utility company can disconnect your service. That’s another $20 fee. Want to reconnect your service? Expect a $30 to $50 fee. Bottom line: a single $100 bill could cost up to $120 in fees.
So, what can you do, if you’re in a pinch, and you haven’t the credit to get a conventional loan?
A viable option is to approach a reputable personal loan provider that is geared toward borrowers with poor credit. Personal loan providers, such as NetCredit, and OppLoans, provide borrowers with poor credit access to loans at lower rates than payday loans.
Personal loans do not require you to place your property as collateral. They also have the benefit of a set end date and fixed monthly payments, which make it easier to budget. Another advantage is that personal loan providers report your payments to major credit bureaus. If you make regular and on-time payments, this can help you improve your credit score so you can qualify for lower interest rates in the future. However, different personal loans come with different rates, fees and requirements, so check out what the best personal loans are to ensure that you choose the best option for you.
Andrew is the managing editor for SuperMoney and a certified personal finance counselor. He loves to geek out on financial data and translate it into actionable insights everyone can understand. His work is often cited by major publications and institutions, such as Forbes, U.S. News, Fox Business, SFGate, Realtor, Deloitte, and Business Insider.