Financial Options to Avoid

It seems like there are a lot of easy, convenient ways to acquire money, furniture, or appliances. But while check-cashing stores, money orders, payday lenders, pawnshops, auto pawnbrokers, rent-to-own stores, sub-prime lending practices, and get-rich-quick ideas appear to make your life easier, they’re usually expensive options that you're better off avoiding.

Check-cashing stores charge fees for cashing your checks. Fees range from 2.5 to 8 percent for every $100. This means you may pay up to $8 to cash a $100 check. So, instead of getting the full $100, you'll get only $92. It may not sound like a lot of money, but it adds up quickly. Besides, it's your money. If you cashed a check at the bank, you wouldn't pay any fee.

Money orders are sold at grocery stores and other places and may be used to pay bills instead of using a bank checking account. Money orders sometimes work well if you only have a few bills to pay every month, but because they cost money, try to avoid using them frequently. A money order can cost up to $1.00, depending on the amount of the money order and where it’s purchased. While the cost seems small, it adds up quickly if you buy several money orders every month. A checking account may be a better option.

Payday lenders loan money to people with a checking account and a job. To use this service, individuals write a personal check to the lender and postdate it, which means they enter a date in the future. Generally, the date is the next payday, and the lender will wait until that day to cash the check. For this service, payday loan stores charge very high fees—sometimes as high as $25 for each $100 requested. For example, for $100 today, a payday lender will ask for a check totaling $125 and promise not to cash it until the next payday. That translates into an incredible 25 percent interest rate for a short-term loan.

Pawnshops loan money in return for an item such as a ring, camera, firearm, or stereo. The shop must keep the pawned item for at least 30 days to allow the owner to repay the loan. If the loan goes unpaid, the store keeps the pawned item and puts it up for sale. Pawnshop loans generally total less than half of an item’s worth, which translates into you receiving only a small amount of money for the risk involved in losing a personal possession with a much higher value.

Auto pawnbrokers take the pawnbroker idea a step further by collecting a vehicle’s title in exchange for a loan. Any missed payment could result in repossession as the broker would claim the vehicle and keep any payments made up to that point.

Rent-to-own stores offer furniture or appliances for rent and promise that a portion of each payment will be credited to the purchase of the item. However, since the bulk of each payment is claimed by the store, the ultimate purchase price could be three to 10 times as much as the item would cost new. Unbelievably, most states do not limit the interest rates charged by these stores, and some don’t even require that the store inform consumers about how much total interest will be paid.

Sub-prime lending practices are used to extend credit to borrowers who do not have good credit and can’t meet the usual standards to get loans with reasonable rates and terms. While this form of lending allows people with blemishes on their credit record to receive loans, the fees and interest rates can be excessively high and include prepayment penalties. Investigate such loans thoroughly before you accept one. It’s usually better to fix your credit before you apply for a loan so you can get the best deal possible.

Get-rich-quick ideas only make the seller of the product or service rich—no one else. These include lotteries, some work-at-home opportunities, and pyramid sales schemes. Generally, these schemes require an up-front fee and regular payments for information regarding goods or services that probably don’t exist. The only proven way to get rich is the slow approach of saving money on a regular basis.