Despite the seemingly obvious benefits, payday loans have repeatedly proven to be an incredible financial drain on people who already live paycheck to paycheck. Often referred to as predatory lenders, these companies tend to cater to those who rely on a limited budget. Before signing the loan agreement, consider these five reasons to stay away from payday loans.

1. Excessive Interest
   Payday loans are typically issued for no more than half your take-home paycheck. Most loans are $100 to $500 and are issued for seven to 30 days. Although some states have capped interest rates at 36 percent, payday lenders are allowed to charge any rate they want. Loans typically start at 300 percent but can go as high as 1,000 percent. Even at the low end of the spectrum, a two-week, $300 loan will cost nearly $35 in fees.
2. Cycle of Debt
   Before leaving the store, you must provide a post-dated check that covers the loan and the fee. Online payday loan companies require a debit card so funds can be automatically withdrawn from a bank account. Fees may be just high enough to cut into living expenses for the following pay period, which means the loan needs to be renewed.
   If you cannot pay the agreed upon amount by the due date, you can pop into the store before the check is cashed to extend the loan by only paying the interest. Oftentimes, a $30 verses a $335 payment is more affordable. Within five months, the interest charged on the account will equal the original $300 principle loan. Despite making monthly payments, no progress is made on paying off the actual debt.
   The Center for Responsible Learning (CRL) describes the short-term aspect of payday loans as a myth. A CRL study that followed 11,000 borrowers for 24 months found that many continued to carry a portion of the original debt two years later. “The actual experience of payday loan borrowers reveals there is nothing quick about the loan except its small principal,” the report criticizes.
3. Damages Credit Score
   Many people believe that any type of loan will help boost their credit score, which determines the interest rates charged on all loans, the premiums paid for car insurance policies and the homes that people are able to rent. When reviewing credit reports, lenders see payday loans as a sign that you are already struggling to pay the bills.
4. Too Easy to Default
   The CRL study on payday loans found that 44 percent of borrowers defaulted on their loans. Payday lenders require a postdated check to cover the original loan agreement. If the check bounces when the lender deposits it, the account goes into default, which triggers a higher interest rate. The account is also assessed a Non-Sufficient Funds (NSF) fee, as well as a late fee. The company may submit the check multiple times in an effort to collect their cash, which means your bank account racks up numerous fees. For each additional month the account is delinquent, the charges increase, up to a cutoff amount of 520 percent of the original loan.
5. The Industry is Largely Unregulated
   The Federal Trade Commission (FTC), which until recently served as the governing body of the payday loan industry, has determined that all lenders have the right to set their own fees and interest rates. Payday lenders make most of their money on default loans, which are charged fees for being late, extending due dates, collections and insufficient funds. The new Consumer Financial Protection Bureau (CFPB), created by President Barack Obama, will now oversee industry regulations.

In the absence of federal guidelines, several states have enacted strict payday loan regulations that cap annual interest rates and limit the number of storefront locations in low-income neighborhoods. Federal laws do prohibit payday lenders from charging more than 36 percent interest to members of the military.

To consumers borrowing money can seem to be a way of getting their hands on “easy money”; but “easy money” can soon cause difficulties when consumers have to struggle with loan repayments. They can find themselves deeper in the debt trap than they had anticipated and it can like an impossible predicament to be in.

While there are some situations where taking a loan is the only option, at other times obtaining personal credit should be avoided at all costs.

1. Bad Reasons to Refinance a Home A look at some bad consumer choices when taking credit against their homes.
2. The Worst Reason for Taking Personal Credit A look at the top ten dumb choices made by consumers when seeking personal loans.
3. 11 Dumb Reasons for Borrowing A look at some common mistakes made by consumers. Including a look at borrowing to have the latest technology and borrowing to gamble.
4. Don’t Borrow Money to Pay for Timeshare Hard sell tactics in the timeshare business are common knowledge but shoppers should never be persuaded to invest in a timeshare property.
5. Why Drivers Shouldn’t Borrow to Buy a Car Reasons why car finance and personal loans for autos are a bad idea. Advice on alternatives to borrowing to afford a car.
6. Don’t Borrow Money to Look Good A warning to those prone to vanity. Looking good is not worth incurring personal debt.
7. Borrowing to Finance a Wedding is a Bad Idea Why couples and parents should not go into debt for the big day. Help with keeping weeding costs down.
8. Borrowing Money to Consume is a Dumb Idea Why credit for consumption is a bad thing for personal finances.
9. Why Borrowing Money to Buy Stock Online is a Dumb Plan A look at the reasons why taking credit to buy stock is not a good idea. A look at why investors should avoid debts.
10. Dumb Reasons Young People Borrow Money A look at the option of saving to afford assets such as cars and homes instead of falling into the credit trap at an early age.
11. Buy Stocks With Savings Not Credit Why borrowing to buy is one way of falling into dumb debt. Why investors should not invest money they don’t have.
12. Don’t Borrow to Improve Credit Score The credit scoring system can make it seem a good idea to borrow money that is not needed but taking unnecessary credit is a dumb idea.
13. Don’t take Loans to Play the Stock Market Sensible solutions to funding stock investment instead of incurring dumb debt in order to invest.
14. Do Not Borrow Money for  a Sacrificial Goat Advice to North Africans as poor harvest and short supplies mean sacrificial animals for Eid Al-Adha are selling for high prices.
15. Borrowing for Weddings and Honeymoons not Recommended A surefire way to incur dumb debt is to take credit to finance nuptials. Suggests some alternative solutions.
16. Don’t Take Credit for Holidays A look at why loans are a bad way to pay for holidays. Avoiding falling into the debt trap for holidays.
17. When Taking Credit is a Dumb Idea A look at reasons not to go for a personal loan. With suggestion of alternative ways of affording needs.
18. Dumb Reasons for Taking a Payday Loan A look at common consumer temptations and why these types of loan should be avoided at all costs.
19. The Dumb Debt Lowdown A look at some of the ways people get into unnecessary debt. Suggests alternatives o avoid the debt trap.
20. Read the Paperwork Before Agreeing to a Deal Buying on credit is a bad way to incur debt. A cautionary tale of getting trapped into a dumb debt, advice on what alternative are out there.
21. Don’t Borrow to Fund Fertility Treatment Advice on the debt trap for couples with fertility problems. Looks at whether taking a loan to finance IVF is the right idea.
22. Taking a Loan for Someone Else is a Bad Move One case study looking at the complications of borrowing on someone else’s behalf. Why you shouldn’t let others borrow for you.
23. Seven Bad Reasons for Personal Credit A look at common causes of bad debt choices and how to avoid them.
24. Stupid Debt Decisions A look at some dumb financial choice including bad reasons for taking a loan. Includes details of some ways to avoid falling into a debt trap.
25. Payday Loans – A Bad Idea A look at this industry that threatens to push consumers into the debt trap. Why payday loans are a bad idea
26. Borrowing ‘Til Payday Creates Dumb Debt A look at the slippery slope of payday loans. Why consumers should steer clear of this type of borrowing.
27. Some Common Dumb Debt Decisions A look at bad ways of taking credit such as from a pawn shop and through a payday loan. With advice to avoid falling foul of personal credit.
28. Don’t Take Out a Loan to Go Fishing and Other Advice A look at some stupid debt decisions that people make and why they should be avoided.
29. Dumb Things to Do with Money A look at common financial mistakes and bad reasons for taking credit. A list of things not to borrow money for and suggestions of other ways to finance projects.
30. The Bad Debt List A look at the worst kinds of personal finance. Ways of borrowing to be avoided by consumers looking for financial security.
31. Don’t Be Fooled By Payday Loans A look at the payday loan debt trap. How it works and how can it be avoided?
32. Don’t Borrow to Cover Other Borrowing Why consolidation is not always the answer. Refinancing can pull borrowers deeper into dumb debt.
33. Don’t Borrow From Retirement Plans to Clear Credit Card Debt Why raiding a 401k is a poor choice for those who owe. Alternative ways to clear the debt backlog.
34. Borrow Now – Pay Later Why taking personal loans can cause problems in later life. The importance of saving for retirement.
35. Don’t Take a Loan from Your 401k One dumb debt decision that consumer can be tempted by in hard times and why it really is a bad idea. Complete with a look at the consequences of this dumb debt action.
36. Don’t Borrow From the Future to Pay off Credit Cards Advice on why retirement funds should not be used to clear personal debt. A look at alternative options.
37. Don’t Borrow Against a 401 for Medical Bills A look at the temptation to use retirement money to clear other debts and why this is not the best path for debtors.-
38. 401 Borrowing is a Dumb Idea Explaining double taxation and other possible pitfalls of taking a loan against a 401k. Why 401 loans should be avoided.
39. Why is a 401 Loan a Dumb Idea? Explaining the reasons to avoid taking credit against retirement funds. A look at all the downsides.
40. Don’t take a Loan to Pay Your Mortgage Reasons not to borrow against a 401 plan to keep up home payments. A look at why this kind of borrowing is a bad idea.
41. 401 Loans a Bad Way To Pay of Credit Card Debt Why obtaining a loan against retirement saving is a bad idea. Advice on reducing credit card debt in other ways.
42. Debt Clearing With a 401 Loan is a Dumb Idea The ins and outs of 401 borrowing and why it leads to seriously dumb debt. Why consumers should not consider this option to clear other credit.
43. Don’t Take a Loan as a Kneejerk Reaction to Debt Problems A look at the way in which dumb debt snowballs with bad decision making. How to avoid falling into this trap.
44. Borrowing to Consolidate Student Loans a Dumb Idea Why obtaining personal credit to pay off loans for studies is not a good plan.  A personal story with a warning to others who owe student loans.
45. Are Student Loans Always Sensible? When taking student loans to finance schooling may not be a sensible idea. A look at why people must make sensible education choices before taking on credit to fund learning.
46. Dumb Things to Do with Money A look at poor money and credit choices. Moves to avoid when dealing with personal finances.
47. Don’t Go Into Debt for a Nose Job A look at one crazy borrowing decision. The story of a single mum on state benefits who decided to borrow to finance cosmetic surgery.
48. Dumb Ways to Fall into the Debt Trap A look at some stupid financial choices. Common mistakes that lead to financial problems for
49. consumers.
50. Insane Reasons to Borrow Money Some crazy explanations of why people fall into the debt trap. Includes an examination of borrowing to gamble and borrowing to consume.
51. Don’t Pay for Someone Else’s Boob Job with a Loan! A cautionary tale for anyone thinking of financing a lover’s enhancements with their own personal credit. A look at what happens when the couple split.

Image Credits: Daquella manera

• Buying a pet. Look, if you really need that rare Tibetan cat that bad, save your money to get it. Animals that come with documentation generally end up costing you a lot more than the price you paid initially. They often need special grooming, special consideration at the vet’s office, and more. Let’s face it, if you can’t afford to pay cash for the animal, you probably can’t afford the upkeep. Go to a local shelter and get a stray instead. They make better pets most of the time anyway.

• A car for your kid. Really, you’re better off making your kids go out and do the same things you did to get your first car. Even in a rough economy, there are plenty of odd jobs kids can do, and fast food places are still hiring all the time. Not only will you not end up paying three times what the clunker is worth, but you’ll teach your kid some responsibility. And if that isn’t a win-win, nothing is.

• Vacation. You might think you can never afford a dream vacation without financing it, but let’s be realistic. If you can afford to finance it, you can afford to save for it. In the long run, it’ll cost you less. Either scale back your plans, or beef up your savings, but don’t take out personal loans to finance a trip that’s going to be over in a week or two. You’ll be paying for it for a YEAR or two. Not smart.

• Paying off other loans. At first look, this may seem like a really good idea. Consolidating all of your bills into one payment sure would make life easier. The problem here is that the overwhelming majority of people who do this just end up taking all of that extra money in their budget and finding something else to buy on time with it. Eventually, you’re back in the same situation except you owe even more money now.

Don’t get the impression that we’re against personal loans. For big ticket items that you need or that will affect your day to day quality of life, they often make sense. Just don’t take them for frivolous things. If you don’t need it, save for it instead.

Photo via jinwesst

Have you ever wondered why that is? Of course you have. To understand why this happens, however, you need to understand something about how personal loan rates work: Banks can charge what they want. There are federal laws that determine what rates banks can charge for military personnel, but other than that there is little in the way of federal regulation that deals with personal loan rates.

You also need to know that your credit score plays a major role in the rate the bank is willing to give you. Accordingly, here are some things you can do to keep the old credit score in a manageable position:

• Keep your credit balances low. If you have credit cards (and you should, if you want a high credit score) keep the balances low or paid off. This will help keep a low ratio of income to debt.
• Don’t have too many credit cards. Having a couple of credit cards is fine. More than four or five is probably too many.
• Pay off your bad debt. Once a debt goes bad, paying it off is imperative and will help out some.
• Get rid of small debt. If you have multiple collections, for example from bad checks, pay them off. They’re hurting your credit score just as much as that late credit card payment.
• Consider negotiating large debt. In some cases, if you can’t pay off a debt, you may be able to settle. It will hurt your credit score, but not as bad as not paying it at all.

Photo via christine [cbszeto]

Here are some of the misleading statements you might hear from lenders:

• This is a “no-hassle” loan! Loans are a hassle, period. They require you to do some legwork in the way of filling out forms and reading through contracts. In the long term, they have one big hassle: you have to pay them. Yes, some loans are easier to get than others, and some loan processes are more streamlined, but all of them have at least a little bit of hassle.
• Everyone is approved! Unless you’re talking about a payday lender with an APR of 400 percent, not everyone is approved. If your credit score is below 500, you’re probably screwed no matter what. It doesn’t mean you shouldn’t apply if you need the loan, but it does mean you face the possibility of rejection. Even if you are approved, your interest rate might be extremely high.
• It’s affordable! The lender doesn’t know for certain if you can afford a loan. Only you know if you can afford a loan. The lender will approve you up to a certain amount based on whether they see you as a risk or not, but that has little to do with your real-life expenses and cash flow situation. Always look at your entire budget before you sign your personal loan paperwork to make sure you really can afford it.

You need to realize something: lenders want to make money. They want your business. They’re going to handle that business, though, in a way that’s most profitable for them. You need to look after your own best interests when considering a personal loan, because the lender is looking after theirs.

Photo via ktylerconk

Part of making that process smooth and protecting your relationship is asking questions. If you ask the questions below before you give a personal loan, you’ll find it makes things easier on down the road:

• Do you really have the money? First, you need to ask yourself if you can really afford to make the personal loan or not. If it’s going to put you in a place of financial hardship, you need to be able to say “no.”
• What’s the money for? If your no-good hippie nephew wants $1,000 to start an organic mushroom farm, you might think long and hard before making the loan. On the other hand, if your son-in-law needs $200 for a plane ticket to fly to a job interview that you think he can land, it might be worth it.
• Will the borrower likely repay you? Take a good look at the person’s past actions. If they regularly borrow money and don’t pay it back, chances are good you won’t see your money again, either.
• Will this cause a rift in your family? A child that borrows money from her parents that reduces the amount of the other siblings’ inheritance might cause a problem. Make sure that it’s either discreet or that it’s not likely to cause trouble.
• Do they have other options? No, you don’t want to send them to the payday loan store down the street where they’ll pay nearly $400 in interest. But, maybe they can borrow the money from their 401K, or maybe they can get an advance on their paycheck.
• What will happen if they never pay it back? That’s always a possibility. You need to decide whether or not it will cause your relationship to fall apart, and you need to be up front with the person about the relationship consequences, as well.

Photo via Photomish Dan

The problem is that this puts you in a precarious situation, in terms of your credit. Your credit score isn’t good enough to get a regular unsecured personal loan from a bank. You might be able to get a car loan or maybe a mortgage, but a loan without some sort of collateral from a traditional financial institution just isn’t in the cards for you.

Still, there are some ways you can get personal loans, even if you have less-than-stellar credit. Here are some ideas:

• Take a cash advance on your credit card. Now, understand first of all that the fee involved in a cash advance, coupled with a higher interest rate, can be extremely expensive. Of course, if you weren’t in at least somewhat of a desperate situation, you probably wouldn’t be considering it in the first place. Just make sure you know what you’re getting into before you key in your PIN.
• Consider a payday loan. Of all the personal loan options out there, the payday loan has the highest interest rate. Ironically, if you’re able to pay it off right away, you may actually wind up paying less in fees and interest than with a cash advance, however. Just make sure you can pay it off, or you’ll wind up having to pay that fee every two weeks for a long time.
• Pawn something. Pawn shops are coming back into vogue. The way a pawn shop works is this: you take something of value into the shop. They loan you money. You pay it back (plus interest) and you get your item of value back. If you don’t pay it back, they get to keep the item of value and then sell it to someone else in order to get their money back.

Photo via kevindooley

Lending Club is a peer-to-peer lending network. This is almost like getting a loan from a friend, with the exception that there is an application process and the lender is some person you do not even know. It is not as bad or scary as it might sound.

First up, the application process. Lending Club has some higher standards for snagging a loan. You must be employed. You must also have a decent credit score. You must be willing to divulge any financial information that people ask for. Keep in mind there are many other people doing this so you are not alone. People just want to make sure that their investment is going to a good place, you.

You can ask for up to $25,000 from investors. Once you are approved, your money can come from one or more people. This is like any other loan and you must repay it. You repay one account though, not several people. Lending Club makes this process as painless as they can.

So no, you have paid your loan off and you have some money you would like to invest. Why not help someone else the same way you were helped out. That is right, you can put your money into Lending Club and make some income. As an investor, you will get to see all the loan requests, ask the questions, and decide where you would like your money to go.

At the time of this writing, Lending Club has funded $93,595,575 in loans and paid $6,481,303 in interest to investors. That’s not a bad setup. This is not something that any Joe can jump on and do. Therefore, you will have to do a bit of legwork to make sure you qualify to borrow or invest.

Like anything on the internet, research is key. Giving your financial information to anyone is a big risk. Therefore, do some research before you jump on Lending Club. Look for people’s stories and how they were treated. Verify that what you are about to embark on is a smart decision for you.

Lending Club is not something to just jump onto. For those that can make use of it, there is a full circle here. Get some money and give some money back. Do your research, make sure you are comfortable with it, and then take the plunge. Who knows, you might just be making yourself some money and not the bank!

Trading work for items you need seems to be a long lost art form. We used to do this all time. Yeah, this idea most likely won’t pay the power bill or keep Dog the Bounty Hunter from tracking down your car and driving it off to the bank. What this idea can do is get you those items you want or need for just a wee bit of manual labor. Oooh, the dreaded manual labor phrase. It is not that bad, I promise.

Let’s take a look at some way you can trade off your muscle power for a burger and a beer. One of first things that comes to mind is spring is vastly approaching. This is a prime opportunity to lend a fellow man a hand. Pull weeds from a garden, rake a lawn, or pick up fallen sticks. These are all simple items that you can do for a bit of lunch.

Sure, this may work easier for those with a yard, but city dwellers are not excluded. Offer to clean someone’s house or wash their car. Even better, offer to watch someone’s kids while they are at work. Just because there is now yard does not mean there are items to be bartered for.

We can take this even further though. If you have a trade skill you can use, this is even better. Take those years of fixing computers and offer to work on a friend’s computer and fix it up. Mechanics can trade oil changes or routine auto maintenance. Carpenters can offer to their labor in building or refinishing. Handy men/women can fix odds and ends. This list could be endless.

This all does not have to be for food though. Trade your hard labor for a night out on the town. Want to go see the latest movie to hit the theaters? No problem, offer to clean someone’s house in exchange for some popcorn and a movie.

Some of these suggestions might seem a little one sided. Sure, your real world wage rate might be $100 an hour. This is where the bartering skills come into play. Find some middle ground that is agreeable to you and the person you are trading the work with. If you feel that car engine replacement job is worth three dinners and a movie, then by all means negotiate that.

The best part to all of this is that it can be done regardless of your employment status. Take a free weekend, trade up some work, get that video game you have had your eye on. Best of all, you spend some time socializing and getting to know that person better.

Sure, going to the bank and getting a small personal loan to live on for the next few days may sound fine, but there are many other ways to get that which you desire. Why not try taking up this lost art form. You never know, this could lead you into something better down the road.

Photo via SuperFantastic

Lucky for you, there’s family. Yes, asking to borrow money from your family is never easy. It’s embarrassing. In addition to whatever other baggage you might have going on, it can be downright humiliating. It’s like admitting that you’re not able or responsible enough to take care of your own financial issues.

Here are some tips to help the process go more smoothly:

• Pick the right person to ask. Don’t ask someone for a personal loan who doesn’t have any extra money, or who’s going through a financial hardship just because you know they’re likely to say “yes.” That’s just taking advantage, and you don’t want to be that kind of person. Pick someone who can afford it.
• Ask for what you need. Don’t ask for less than what you need because you’ll just be back asking again next month. Figure out, realistically, how much you need and ask for that. If you think it’s too much for one person to loan you, ask several different family members until you get the amount you need.
• Have a repayment plan. Don’t just vaguely agree to “pay it back as soon as you can.” Set out a plan with specific dates and specific amounts. That helps you as well as the person lending you the money know what to expect.
• Repay promptly. No, your uncle Jed isn’t likely to report you to the credit agencies for not paying back the $300 you used to get a new muffler on your Pinto. But, not paying back promptly and in the agreed-upon timeframe can damage your relationship. Credit reports clear up. Relationships take a heck of a lot more to rebuild. Don’t wait for the deadline if you can’t make a payment. Talk to them as soon as you realize you’re not going to be able to make it.
• Put it in writing. You can get a loan agreement relatively cheaply at an office supply store. Work up a legitimate agreement. This will help your family member be more confident in your desire to repay the loan, and will also give them recourse if you don’t.

Photo via Orin Zebest