A recession like the one we’ve had brings desperate times for many people, and desperation can cause people to make a lot of poor decisions with their money. These decisions can make you think that you’re getting out of a tough spot when really you’re magnifying your financial problems in many cases. Being aware of these potential financial pitfalls will help you to make wise financial decisions even when times are tough.
- Payday Loans: There are an awful lot of people living paycheck to paycheck right now and sometimes those paychecks don’t come soon enough. Payday loans are enticing because they allow people to get their hands on money sooner than the arrival of their paycheck and help desperate people to make ends meet. A payday loan basically works by inviting a consumer to write a post-dated check for a certain dollar amount and then receiving a smaller amount of cash. Sometimes the dollar fee seems small, but on an annualized basis, the interest rate on a payday loan often exceeds 400%. This is not easy money!
There are several available alternatives to payday loans. Depending on your work situation, some employers are understanding enough in an emergency to advance a portion of your upcoming paycheck. There are other creative ways to raise money in a pinch. Consider a garage sale or selling items on Craigslist. In any case, you should focus on building an emergency fund during months where you have available funds to protect against the need for services such as payday loans.
- Debt Settlement Services: No one likes being in debt and there are millions of people that can pay nothing but the minimum payment on their debts each month. If your debt is mounting and you’re struggling to make timely payments, one of your options is debt settlement. Unfortunately, many debt settlement offers sound too good to be true because they are! If you owe lenders thousands of dollars, they aren’t likely to simply forgive that debt. Many debt settlement companies offer to negotiate for better terms with your lenders, but you could handle these same debt negotiations on your own. Debt settlement can also damage your poor credit history score in ways that could take years to repair.
- Withdrawing Funds From Retirement Plans: Many people have drained their IRA’s and 401K’s over the past year, desperate for cash in a tough economy. If you’re under 59 and a half, you’re going to pay at least a 10% penalty on everything you withdraw and you’re going to pay ordinary income taxes on the withdrawal. In other words, you’re paying a heavy price to sacrifice your financial future and retirement income. A better bet is to consider a loan from your 401K instead of a direct withdrawal. Taking money from retirement accounts should be a last resort in a time when you need cash.
- Title Loans: A title loan is a loan where you put up collateral in the form of a title to something you own, usually a car, boat, or RV. These are usually short term loans with extremely poor interest rates. The risk for the lender is minimal because they have your vehicle as collateral on the loan. The risk for the borrower is huge, and losing a major asset will only compound your financial hardship.
