The Perils of Fast Cash

Getting low on funds as the semester begins to wind down? Tempted by those fast cash advertisements? Well, listen up: Turning to an alternative financing service such as a payday loan is really a bad idea. Here’s why.

Payday loans are short-term (usually two-week) cash loans that carry significant fees and/or finance charges. Here’s how it works: A borrower writes a personal check to the lender for the amount borrowed plus a fee for borrowing the money. The lender will give the borrower the money, less the fee, and agrees to essentially hold the check until the due date, which is usually the next payday. If the loan is not paid back on time and the borrower extends or “rolls it over,” new fees are charged on top of the original loan. For example, a payday loan of $100 that carries a $15 fee is equivalent to an annual percentage rate of 391 percent; roll the loan over three times and the finance fees increases to $60 for a $100 loan! Not only that, but some lenders provide the loans via a prepaid card that you can overdraft, resulting in even more fees. In addition, if the lender deposits a repayment check and there isn’t enough money in the borrower’s bank account to cover the check, the borrower is hit with even more fees for insufficient funds.

There are also numerous short-term lending businesses accessible online—be wary, because most are in fact payday loan services. They promise fast cash and five-minute applications, but at ridiculously outrageous rates.

The bottom line is that these types of loans have such a short timeline that most borrowers cannot afford to both repay the loan and manage their other living expenses, trapping them in a cycle of increasing debt.

Auto title loans, which allow a borrower to use his/her car as collateral for a loan, is another type of fast cash service that comes with steep costs. Not only are interest rates extremely high (200-300% or higher), but the borrower risks losing what may be one of their only assets—their car. Here again, many states have banned them because of their predatory nature.

Tax Refund Anticipation Loans have mostly disappeared and have been replaced with what is known as a Refund Anticipation Check (RAC) service. Basically if you don’t have the money to pay a tax preparer, you sign up for a RAC and are provided with a temporary bank account, and the fee is deducted from your refund once it is deposited. Fees typically range from $30 to $35.

Using this service does not speed up your refund, and it is important to remember that there are free tax preparations services available. The IRS Free File program is available to any taxpayer with an adjusted gross income of less than $57,000. For the quickest refund possible, you can prepare your return and file it online for free. In addition, the Volunteer Income Tax Assistance (VITA) program is available to those who earn $51,000 a year or less.

Before considering any of these financing options, carefully weigh all your alternatives, such as:

  • Talking to your creditor about extending the due date if you think you will be late on a payment
  • Working some overtime or taking on an additional job
  • Asking a relative if they can help you out
  • Requesting a pay advance from your employer
  • Contacting your school to see if they can provide a small emergency loan (you may have to be approved for financial aid)
  • Finding a credit union or a small loan company that may offer loans at more reasonable rates
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  • Sarah Noelle

    This is very, very true. I would also add, just based on my own experience as a broke student, that one of the other alternatives that people often turn to — taking out more student loans for living expenses — is also not a great idea unless you really, really need to and there are no other options. Even though the interest on student loans is lower than on payday loans or credit card interest, it’s still debt. I took out far more student loans than I necessarily needed to, just because I didn’t think through the alternatives, and I’m still dealing with that debt today, years later. I wish, in retrospect, that I had picked up a second job or asked family or friends to loan me small amounts of money. Debt is debt is debt, and none of it is fun.