Your water heater just kicked the bucket, your spouse got into a fender bender in the grocery store parking lot, and your mortgage payment is due next week. Suddenly, you’re wishing you would have stockpiled an emergency savings fund, but extra cash is nowhere to be found. You can’t take cold showers forever, and your insurance company still needs your deductible to cover the rest. Plus, being late on your home payments isn’t an option.
There’s never a convenient time for financial emergencies, and you’re not alone if the above scenario is enough to make you break out in a cold sweat. Two-thirds of Americans don’t have $500 to cover a car repair, let alone the cash to cover a trifecta of mayhem. Still, hardships like this are all too realistic, and you might be tempted to use (almost) whatever means necessary to get cash fast.
The problem is, some of these tactics are completely legal but could spell disaster for your finances in the long term. Even if you owe a few hundred dollars — and need it yesterday — there are some methods for getting that short-term cash that you should avoid at almost all costs.
1. Car title loans
On the surface, car title loans could seem like an easy way to get a small, short-term loan. You can borrow $1,000, often for periods of 30 days or so, and you don’t need to go through the typical steps of getting a loan, like having a credit check or filling out lots of paperwork. All you need to do is hand over the title of your vehicle as collateral. Easy right?
Getting that initial $1,000 isn’t the hard part, but keeping your car without going further into debt is. In most cases, those loans have interest rates of 300% or more, and Pew Charitable Trusts found that people often spend at least $1,200 on top of the original $1,000 loan. What’s more, about 11% of people who sign up for a car title loan eventually lose their vehicle — which typically drives them deeper into financial woes.
Consumer advocates say the loans are predatory because they’re given to people who don’t have much hope of repaying them in the allotted time. “The 30-day car title loan is a myth,” Leslie Parrish, a senior researcher at the Center for Responsible Lending, told Edmunds. Parrish added that most title loans are rolled over at least eight times — racking up extra fees for every 30-day period — before the car is either repossessed by the car owner or the title loan dealer.
Those long odds of repayment are why the practice is only permitted in 25 states. Some states cap the interest rate at 36%, but most title loan offices don’t operate in those states because they don’t consider that financially feasible. (MoneyTips suggests this should be a red flag indicative of the sketchy nature of the loans in general.)
2. Credit card cash advances
If you have a credit card, chances are you also have the opportunity to secure a cash advance on that card. Essentially, the credit card company will allow you to borrow money, but there are several ways this is way worse than putting charges on your normal monthly bill.
For one, cash advances don’t have grace periods for the loans. When you make a credit card purchase, you have a 30-day grace period to pay it back before you start racking up interest on those charges. With cash advances, the interest you owe starts accumulating immediately. On top of that, the interest rate on cash advances is often much higher than that of your typical credit card bill. A study of 100 top credit cards by CreditCards.com found that the median interest rate on cash advances is 24.24%. The cash advance rate is typically at least 6% higher than the rate you normally pay on credit card charges.
Banks and credit issuers tend to have higher interest rates because it’s a higher risk that the advance will be paid back in a timely fashion. “It’s about managing the risk with these people,” said Darrin Graham, vice president of marketing with Premier Bankcard, which offers a MasterCard with 36% interest. “It’s like car insurance. If you’ve had an accident in the past, you will pay higher rates for awhile.”
3. Payday loans
Payday loans work a lot like credit card cash advances, but tend to be even worse for your wallet in the long run. Payday loans are offered by lenders against your next paycheck, so the rollover is typically two weeks.
On the surface, these loans might seem just as innocent as cash advances do at the onset. For instance, a $15 fee on a $100 loan might not seem like a lot, Investopedia states. But if you calculate it out, that’s almost a 400% interest rate for the year. In theory, you wouldn’t have to worry about the APR if you paid back the loan right away, but these are almost always rolled over for significant periods of time.
Investopedia also reports that 82% of payday loans are rolled over from one paycheck period to another, which racks up another set of fees. What’s more, about half of borrowers end up paying more in fees than they actually borrowed in the first place, digging a financial hole that’s hard to escape.
4. Second mortgages
There is a time and place for second mortgages, when you borrow money against the equity you’ve already built up in your home. However, using a second mortgage to cover short-term costs generally isn’t a good idea, especially if you’re having trouble making payments on any other outstanding debts.
Before the housing market crash and the Great Recession ensued, borrowers took out second mortgages frequently when their primary mortgage companies didn’t cover the entire cost of the house they wanted to purchase. In some of those cases, people would end up only paying 2% (or similar figures) on their houses, and ending up in debt for the other 98% of the value of the house. When the housing downturn happened, many people had trouble making their first mortgage payments, let alone the second mortgage payments for what technically should have been the down payment. It can be ok to use a second mortgage, but only if you know you can make the monthly payments and afford at least 10% down on your house, LearnVest recommends.
In another scenario, people use cash-out second mortgages to pay for other things they need — like replacement utilities or vacations they otherwise couldn’t afford. If you’re in this situation, resist the urge to take out a second mortgage. While it is a less expensive option in terms of debt repayment compared to the others on this list, this puts your home at risk. You pay your first mortgage to increase the percentage of equity you have in your home. Don’t make that disappear by putting that equity on the line as collateral.
5. Ask family
Asking family or friends for a loan to help you through might seem appealing at first, but when possible, it’s likely a better idea to seek that help from a bank or other source that’s not tied to you personally. Some of the same reasons it’s not a good idea to lend money to friends and family come into play as borrowers, too. For one, private loans like this — which won’t show up on your credit report and perhaps don’t have any interest — could tempt you to linger in debt longer than you would if the loan were through a bank. It might sound nice at first, but if you hope to avoid money emergencies in the future, you’ll want to get on solid financial footing. That won’t include a bunch of outstanding IOUs to your parents or other relatives.
About 44% of people in older generations have provided money for younger family members in recent years, but that money won’t last forever. If you make a habit of borrowing from family members when your own bank account comes up short, you could be in for a rude awakening when they’re no longer around to supplement your income. One survey found that 59% of working age Americans plan to leave some kind of inheritance for their children, but only 31% are actually able to do so when the time comes. Don’t get into the habit of using your family’s money as a crutch — it’s never going to be a guarantee.