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5 Stupid ‘fixes’ for money woes…

Posted by Stephen on July 24, 2008

Desperate times can make for bad decisions. Remember: If a solution sounds too good to be true, it probably is. And the words ‘quick and easy’ should set off alarm bells.

By Liz Pulliam Weston

A souring economy brings many unpleasant things. Layoffs. Bankruptcies. And what can only be called the Bad Idea Brigade.

Most of these are businesses that thrive on consumers’ desperation and desire for a quick fix. Their advertisements on the Web, radio and television are kicking into high gear right about now.

Out of money? Don’t worry, they say, you can hock your next paycheck or your car. In debt? They’ll make it go away or at least make it more “affordable.”

Or maybe you’ve come up with your own “solution” for a money problem: raiding your retirement funds. The money’s just sitting there, right? Here’s what to think about the next time you’re tempted by one of these fixes:

Stupid fix No. 1: Payday loans

Your wallet’s empty, your checking account is running on fumes, and it’s still a long way to your next paycheck. So you trundle over to your friendly neighborhood payday lender, write a postdated check for $300 and get $255 in cash.

That $45 fee may not seem like much, but for a two-week loan it translates to an annual interest rate of nearly 400%. (Read “Loans with triple-digit interest” for more details.)

What’s worse, one payday loan may touch off a cycle of borrowing that can quickly escalate into big bucks.

Because, let’s face it, if you were good at managing money, you wouldn’t need a payday lender. You’d have an emergency fund or access to cheaper (much cheaper) credit. So chances are good you’re going to run out of money again before the next payday, especially since you now have to pay back that $300 loan.

Drowning in debt? Ask an expert, for free

That crunch leads many people to renew or roll over their debt, or borrow from another payday lender.

“I cannot get out of the cycle of paying one off,” reader “Seth” e-mailed me recently, “and then having to take out another to make it to my next payday.”

Reader “Valerie” is in even worse shape. She owed so much to payday lenders that they cut her off and put her on a repayment plan. That might be OK if she could manage the $1,500 monthly payment, but she can’t.

“I just cannot afford this,” she lamented. “I am extremely stressed about all these debts.”

You have plenty of better alternatives. In the long run, of course, you want to build up a cash cushion (see “Why you need $500 in the bank“). But for now, you can deal with a true emergency in these ways:

Ask your employer for an advance. Some companies will give you a cut of your check early. Approach your human-resources department.

Check with a credit union. Not-for-profit credit unions worry about their members resorting to payday lenders and have come up with alternatives, including short-term loans. If you don’t belong to a credit union yet, read “Ditch your bank for a credit union” and check out FindaCreditUnion. com.

Sell something. Anything. The quickest way to raise cash may be to have a yard sale.

Get a cash advance on your credit card. This is a pretty expensive option because cash advances usually accrue at a much higher interest rate than other credit card debt — typically well over 20%. But that’s a bargain compared with a payday loan.

Stupid fix No. 2: Title loans

Title loans are a lot like payday loans: They come with triple-digit interest rates and short payback periods (usually one month), so many borrowers wind up “renewing” the debt over and over, often paying far more in fees than they initially borrowed.

The big difference is that if you fail to pay, the lender can take your car.

Multimedia on MSN Money

Groceries © Tom Grill/Corbis
How I slashed my food budget

MSN Money columnist MP Dunleavey tries using smarter shopping and meal planning to cut her family’s food spending in half.

If that’s what gets you to your job, you could quickly have an even bigger financial nightmare on your hands (no car and no job).

The better alternative: If you have substantial equity in your car, you may be able to sell it, buy something cheaper and use the difference to meet your cash needs. If that’s not a good option for you, explore the alternatives above.

Stupid fix No. 3: Debt settlement

Debt-settlement companies promise that you can get out of your debts for pennies on the dollar. Typically, these outfits demand that you stop paying your creditors and instead send the money to them. After a few months, the debt-settlement company promises to open negotiations with your lenders and use the money you’ve sent to pay them.

Continued: What it costs you

The idea is that after a few months of not getting paid, your creditors will agree to a fraction of what they’re owed.

Of course, your credit will be trashed at this point, you’ll have paid fat fees to the debt-settlement company, and you may be facing lawsuits from your lenders. That’s if you’re lucky. If you’re not, you’ll risk all this, and the debt-settlement company will disappear with your money. If you need more details, read “Debt settlement: A costly escape.”

Better alternatives include:

Credit counseling. Legitimate credit counselors have debt-management plans that reduce or eliminate the interest rates on your credit card debt. You can find one by visiting the Web site of the National Foundation for Credit Counseling. (Credit counseling may have implications for your credit rating — read “The consumer’s guide to credit counseling” for details — but the effect is far less than if you try to settle your debts.)

Bankruptcy. If you can’t pay your debts, you may be better off getting a fresh start through bankruptcy. Your credit rating may recover more quickly, and you’ll be able to keep the cash you would have otherwise sent to the debt-settlement company. Consult an experienced bankruptcy attorney who can evaluate your situation and discuss your options. MSN Money’s bankruptcy guide offers resources, information and tips.

Stupid fix No. 4: Debt-consolidation loans from private lenders

If you owe money to lots of creditors, you may be a sucker for pitches from debt consolidators, which promise to combine all your debts into one “affordable” loan.

Unfortunately, though, these loans often come with high interest rates and hidden fees. Instead of helping you pay your debt off faster, a debt-consolidation loan can stretch out your repayment schedule so you actually end up paying more. (Read “Insider’s guide to debt consolidation.”)

Better alternatives include:

A do-it-yourself plan. If your credit’s good, you may be able to negotiate lower interest rates on your debt. (See “Get a better deal . . . with a threat” for techniques.) Then you can tackle your bills one at a time, starting with the highest-rate debt or the credit card that’s closest to its limit, while paying the minimums on your other debt. Once this high-priority debt is paid off, make the same-size payment to the next-highest- priority debt. Continue until you’re debt-free.

A debt-consolidation loan from a credit union. Because they’re member-owned, credit unions tend to offer more-reasonable interest rates than other lenders.

Credit counseling. If you can’t afford to make the minimum payments on the debt you have, a credit counselor’s debt-management plan might be your best option. See details above.

A home-equity loan. Consider this option only if you have plenty of equity in your home, you stop the behavior that got you into debt in the first place and you pay off the loan as quickly as possible. Otherwise, you’ll just be draining one of your most important assets, and you’ll wind up deeper in debt in short order. (See “5 tips for wisely tapping your home equity.”)

Stupid fix No. 5: Retirement plan withdrawals

I think I’ve heard every idiotic rationale for raiding 401(k)s and individual retirement accounts: “Well, the market isn’t doing that great anyway.” “I’m young. I’ll have plenty of time to build it up again.” “But I need the money.”

To which I respond: “So what?” “No, you don’t” and “No, you really don’t.”

You’ll have to pay penalties and taxes on any withdrawal. Worse, you’ve lost all the future tax-deferred returns that money could have earned. If you’re 30 years from retirement, figure every $10,000 withdrawal costs you at least $100,000 in lost future retirement income, assuming 8% average annual returns (and yes, over time the stock market should do at least that well).

Multimedia on MSN Money

Groceries © Tom Grill/Corbis
How I slashed my food budget

MSN Money columnist MP Dunleavey tries using smarter shopping and meal planning to cut her family’s food spending in half.

The damage is actually worse the younger you are. Someone 40 years from retirement would lose more than $200,000 for each premature $10,000 plan withdrawal.

Better alternatives:

Retirement plan loans. These are far from risk-free, but they’re better than withdrawals. Most workplace plans, including 401(k)s and 403(b)s, allow you to borrow up to half your balance or $50,000, whichever is less. Typically, you pay the money back over five years. Keep in mind that if you lose your job and can’t pay back the loan, it becomes a withdrawal — with all the taxes, penalties and lost returns you were trying to avoid.

Just keep your hands off. In general, leave your retirement accounts for retirement. You can usually find a better solution to your money problems than raiding your future.

Liz Pulliam Weston’s new book, “Easy Money: How to Simplify Your Finances and Get What You Want Out of Life,” is now available. Columns by Weston, the Web’s most-read personal-finance writer and winner of the 2007 Clarion Award for online journalism, appear every Monday and Thursday, exclusively on MSN Money. She also answers reader questions on the Your Money message board.

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3 Responses to “5 Stupid ‘fixes’ for money woes…”

  1. Unfortunately there are many “Consumers” out there who have not been taught the proper practice of only buying that which you can afford…

    Too many people have outspent their incomes by way of credit cards and being able to defer responsibility until they are way too deep to pay their own bills. And then many feel they will get a “Free” start if they simply declare bankruptcies.

    Not something that can always be taught in school. Has to be taught in the home but we have gotten to a point where the teacher in the home is actually the one who is doing the buying on credit without the ability to pay down the road. What message does this send our future “Consumers”?…

  2. You are correct RightsideVA. We are the actual teachers for our children who teach them about right and wrong decisions about anything we spend.

  3. Stephen said

    AHHHHHHHHHHHH, you’ve got to love it. How pathetic a job it must be to attempt to pass off a predator lender as a debt consolidator. Payday loans are nothing more than violators of usery laws. Anyone who falls for the manipulative tactics of this predatory industry have cealed their financial fate.

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