Loans that Low Income Families Should Avoid

If you are a low income wage earner, then you may be tempted to take out loans that can get you emergency cash or items that you would like to have, without waiting. Unfortunately, many of these loans that are targeted towards low-income individuals can be hard on the wallet. They should be avoided at all costs. Living on a limited income is difficult, but if at all possible, it's important to avoid payday loans, Rent-a-Center type establishments, and refund anticipation loans. They charge exorbitant fees and interest rates that will only make it harder to pay the bills later.

Payday Loans

Payday loans can seem tempting if you're on a limited income and are facing an emergency. If your car breaks down and you cannot get to work, what are you going to do? While there may be true emergencies where taking out a payday loan is a necessity, it's important to avoid payday loans at all costs. Not only will you have to pay the loan back with your next paycheck, you will also have to pay extra interest and fees to the lender. How do you avoid payday loans? Don't ever use them if it's not a true emergency. If your car breaks down, you might need it; but if you can take the bus to work while you save up the money to pay for the repairs, you might be able to avoid it. Clothing, iPods, and presents are probably not emergencies that require you to take a payday loan. If you have to take out a payday loan, take out the smallest amount that you need.

Renting Furniture and Appliances

If you can barely afford to make the rent and pay the bills, using a furniture and appliance rental store like Rent-A-Center can be tempting. Unfortunately, the amount that you will pay for your rented furniture or appliance is well over the retail cost of the item. The low weekly payments may fool you into thinking that you're not paying that much for an item, but the monthly cost is often not that cheap. While Rent-A-Center might be a good choice if you only need furniture for a few weeks, it's not the way that you want to buy furniture.

Rent-A-Center is one of the easiest places to avoid. Buying a new washing machine and dryer might be tempting, but going to the Laundromat is probably a less expensive option. Nobody needs a new couch, dining room table, or television set. These things can be purchased used at a thrift store for a lot less money, or you can do without for a while. In my family, we have sat on the floor on blankets before, and we have also used metal folding chairs.

My friend recently picked up a couch, love seat, washer, and dryer at Rent-A-Center. She told me that if she didn't buy the furniture at Rent-A-Center, she didn't think that she'd ever be able to afford the items. That is not true. If she could afford the Rent-A-Center payments, she could afford to set the money aside and pay herself every week, until she could afford these items. It might take a little bit of self-discipline, but it is possible. Additionally, if she ever ran into a financial emergency, she wouldn't lose the furniture and all the money that she had invested into it. She eventually ended up returning the furniture when she had to move in with relatives. I can't afford nice furniture right now; I chose to buy an inexpensive futon. When we have more money later on, we will buy something nicer.

Tax Refund Anticipation Loans

The tax refund anticipation loan is often one of the saddest kinds of loans that low-income people can fall for. During tax season, you can get your taxes back a little bit earlier in exchange for paying a fee. This may be tempting, especially if you are getting a large refund due to the Earned Income Credit. Unfortunately, the fees are extremely high. Fees can reach up to $300, including the tax preparation fees. Considering that low income individuals can take advantage of free tax preparation online and get their refund in a few weeks, refund anticipation loans can be pretty expensive. If you paid $300 to get a $3000 refund anticipation loan instantly, instead of waiting for a couple of weeks to have it deposited into your bank account, you could effectively be paying a 260% interest rate. These loans make credit card interest rates look tame by comparison. While the fees you pay include the tax preparation costs, doing your taxes online is not that difficult. While having the extra money a little bit faster is nice, getting your hands on that money a couple of weeks earlier is usually not an emergency.

Sources:

Hunsberger, Brent. "Refund Anticipation Loan? Just Say No". Oregon Live.com, 23 January 2010.

Previous projects that I have worked on writing about payday loans.