2. Car title loans
Some consumers believe that borrowing against a vital asset like a car is a great idea. Never mind that it usually serves as the primary mode of transportation to work.For unfathomable reasons, legislators disagree. Car title loans are illegal in some states, and in others limits are imposed on the amount of interest that can be charged.
According to the Center for Responsible Lending, most car title loans charge interest with an annual percentage rate of well over a 100 percent and they are generally due within one month. These rates are comparable to those of loan sharks.
Here's how they work: Borrowers secure their loans with their fully paid-for cars at one of these shops. This means that failing to pay back the loan can have predictably severe consequences.
If you don't or can't pay back the loan, the lender will take your car and sell it. And the lender doesn't have to give you back the change either, says Eric Cramer, Certified Financial Planner, an Atlanta-based financial planner with Charles Schwab.
It's hard to decide which is worse: being rendered car-less or receiving a visit from thugs who demand their money in return for allowing you to keep your unblemished kneecaps intact.
3. Tax refund anticipation loans
Why wait for the IRS when your tax preparer will give you your tax refund right away?One argument against refund anticipation loans is that they cost a lot for what you get.
"They usually have a high interest rate, so you really have to read the fine print. And most people do not read the fine print," says Mechel Glass, director of education for Consumer Credit Counseling Service of Greater Atlanta. "See what the interest rate is -- that is the penalty for getting your money right away. My advice would be: Just wait for your refund."
Taxpayers have several options when it comes to avoiding refund anticipation loans. In the first place, you can skip giving Uncle Sam an interest-free loan all year long by changing the amount that's withheld from your paycheck. That way you give yourself a raise and the government takes only the amount that's owed. Then the refund amount will be minimal, of course.
Alternatively, having the refund directly deposited into a bank account greatly decreases the time spent waiting to get the cash.
In addition, borrowers can go to a small bank or credit union and build a relationship. "Then you can get small loans from those types of places to help you build your credit score and have a place to go for smaller loans of $100 or $500," says Glass.