Thrifty Thinking: Emergency Loans

If you're really strapped for cash, you might be thinking of getting an emergency loan, or as Credit Sesame calls them in a recent post, Loans of Last Resort. I'm reposting with permission here, and I encourage you to visit their website to find out more about ways to find financing appropriate to your situation.

1. Title Loans

If you own a car and hold the title to it, a title loan is an option but be forewarned. In exchange for a loan, you hand over your title to the lender, who keeps it until you return the loan, which comes with high fees and high interest rates. The minimum monthly payments often don’t include principal payments, so you can pay a lot of interest over a long period of time and still not repay the original loan. If you can’t repay the loan, the title loan company keeps your car title – and, of course, your car. If at all possible, these loans should be avoided.

2. Payday Loans

Here’s how a payday loan works: You write a post-dated check for the amount you want to borrow, plus a fee of about $15 for every $100 you borrow. The lender holds the check until you get paid. On payday, you take cash to the lender and exchange it for your post-dated check, or you allow the lender to deposit the check you wrote.

If you get one of these loans, you may end up repaying most or all of it with your next paycheck. But often what happens is you repay some of the loan because you need to use some of your paycheck to pay your bills, so you need another payday loan. Another common scenario is borrowers ask the lender for more time to repay the loan, and they must pay the fee a second time. If you are charged, say, a $20 finance fee for every $100 you borrow, your annual percentage rate is 521 percent. Again, if at all possible, these loans should be avoided.

3. Reverse Mortgage Loans

These are for people with equity in their homes but not enough money to pay their home loan or other bills. The lenders take equity out of your house and give it to you in cash so you can pay your bills. The downside is you must repay the loan to regain your equity, and if the borrower dies or sells the house, the entire loan must be repaid, interest and all.

4. Pawn Shop Loans

If you decide on a pawn shop loan, you leave something valuable, such as jewelry, at a pawn shop, and the pawnbroker loans you money, usually about a third of what the item is worth. If you don’t repay the loan – usually in 30 or 60 days -- the pawn shop keeps what you left and tries to resell it. A lot of people like pawn shops because they won’t run a credit check on you. The loan is secured with the item you left there so there is no need for one.

5. Sub-Prime Mortgage Loans

These loans are for folks who want to own a house but have little or no savings. They gained notoriety during the early to mid-2000s, when many mortgage lenders gave money to just about anyone who wanted it, even if the borrowers didn’t earn enough money to realistically repay the loans. These loans contributed to the nation’s housing crisis and caused many people to lose their houses and ruin their credit history. For that reason, very few lenders still offer them and they are much harder to qualify for stated income loans are no longer allowed.